Trade policy uncertainty and its impact on the stock market-evidence from China-US trade conflict

We study the impact of international trade policy uncertainty (TPU) on equity markets. To capture the current tension in the relationship between China and the US, we use monthly stock market volatility and TPU indices of China and US from 2000 to 2019. By adopting a time-varying VAR model (TVP-SV-VAR), we find that TPU has heterogeneous effects on U.S. and China stock market. U.S. TPU has stronger impact on both U.S. and Chinese stock market. Time-varying characteristics show that U.S. -China trade conflicts have positive effect on U.S. stock market but a negative effect on Chinese stock market.

Automated summary

The study reveals that international trade policy uncertainty has heterogeneous effects on the stock markets of the U.S. and China, with a stronger impact observed in the U.S. The U.S.-China trade conflicts have a positive effect on the U.S. stock market but a negative effect on the Chinese stock market, as shown by the time-varying characteristics.