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The effects of Trump’s trade war on U.S. financial markets

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  • Chen, Yong
  • Fang, Jing
  • Liu, Dingming

Abstract

We study the impact of President Trump’s trade war on U.S. financial markets by integrating trade war–related news into a single “trade war shock,” based on a structural vector autoregressive model identified via event-day heteroscedasticity. We find that the identified trade war shock not only significantly affects financial variables such as stock prices and Treasury yields but also explains at least 30% of their variation on impact. The main channels through which the trade war shock affects the S&P 500 index and 10-year Treasury yields are the growth news channel, through which the trade war shock changes investors’ growth expectations, and the risk premium channel, through which the trade war shock generates shifts in risk appetite or economic uncertainty. Additional analyses that employ stock prices in the S&P 500 index to explore the role of firms’ global value chain exposure during the trade war reveal that firms with high output exposure to China’s market suffer significantly more from the trade war, while input exposure does not cause a persistent significant difference.

Suggested Citation

  • Chen, Yong & Fang, Jing & Liu, Dingming, 2023. "The effects of Trump’s trade war on U.S. financial markets," Journal of International Money and Finance, Elsevier, vol. 134(C).
    • Handle: RePEc:eee:jimfin:v:134:y:2023:i:c:s0261560623000438
    DOI: 10.1016/j.jimonfin.2023.102842
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    More about this item

    Keywords

    Trade war; Financial markets; Identification by heteroscedasticity; Global value chain;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F10 - International Economics - - Trade - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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