Can U.S. trade policy uncertainty help in predicting stock market excess return?

Abstract

This study mainly sheds additional light on the role of U.S. trade policy uncertainty in forecasting equity premium. Theoretically, the trade policy uncertainty can exert a negative impact on stock market and economic system from exporter/importer and investor sentiment channels. Our empirical results show that the trade policy uncertainty can successfully predict the U.S. equity premium. Furthermore, we find that the superior forecasting performance of trade policy uncertainty is reflected in the period of recession.