Trade Policy Uncertainty and Global Stock Returns: Evidence from the 2016 US Presidential Election

Abstract

Pástor and Veronesi (2012) develop a general equilibrium model to examine the relation between policy uncertainty and asset prices. Extending to their study, we develop a novel measure of firms’ uncertainty about the change in bilateral trade flows between each country and the US. We investigate the effect of trade policy uncertainty on the stock returns of firms in 52 countries around the 2016 US presidential election. Our findings show that firms with greater uncertainty about trade policy experience more negative stock returns during the election. Our results further show that this effect is more prominent for riskier firms or firms with more firm-specific information in their stock prices. Additionally, this effect becomes stronger in countries with closer social, economic, and political integration with the US or with stronger investor protection.

Keywords: Trade policy uncertainty, stock return, bilateral trade flow, information asymmetry, and globalization

JEL Classification: F13, F23, G14, G15, G32