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.
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