Market whiplash after the 2025 tariff shock: an event-targeted VAR approach

On 2 April 2025, the U.S. President announced one of the largest tariff packages in history, triggering sharp financial market reactions. Yet within six weeks, markets had largely recovered. This paper develops an event-targeted vector autoregression (ETVAR) framework to disentangle three potential explanations for the recovery: the transitory nature of the initial shock, offsetting tariff announcements, and other macroeconomic surprises. Our orthogonalisation method isolates a dominant shock from the "Liberation Day" window and tracks its dynamic impact. Realisations of this orthogonalised shock explain 60–80% of the recovery in equities, copper prices, the VIX, and short-term inflation expectations. In contrast, the dollar's persistent depreciation and movements in government bond yields largely stem from other orthogonal shocks, coinciding with a sudden deterioration in Treasury market liquidity. The findings highlight the limits of attributing all market movements to trade policy and demonstrate the value of a flexible, event-driven orthogonalisation strategy.