Abstract
I explore empirically the interactions between international trade and stock markets. A simple Lucas-tree two-country, two-good, free-trade model with complete asset markets predicts that stock markets forecast trade flows and that stock markets react immediately and fully to news about trading partners. I test the predictions of the model and find that stock market returns of trading partners do forecast trade flows. The stock market return of a country's major trading partner predicts future exports to that partner as well as future imports from that partner. Stock markets, however, do not react immediately and fully to news about trading partners. Stock market returns of a country's major partners forecast the subsequent stock market return of that country. Strategies based on trade momentum yield monthly alphas of over 120 basis points. Trade momentum appears consistent with gradual information diffusion.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
