Top

Economic Change and Restructuring

Published in:

01-04-2024

Does trade policy uncertainty in China and USA matter for key financial markets?

Authors: Adeel Riaz, Assad Ullah, Li Xingong

Published in: Economic Change and Restructuring | Issue 2/2024

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

The escalation of tit for tat tariffs between China and the USA has resulted in an unprecedented hike in the trade policy uncertainty (TPU). Such an increase in the volatility of the policy environment could be consequential for the whole economic structure, including financial markets. In this backdrop, we investigate the influence of TPU of these giant economies for the key financial markets, i.e., commodity (energy and non-energy), credit, and stock market by employing TVP-VAR connectedness approach for the period starting from Jan-2000 to Feb-2021. The results of the time-varying spillovers suggest that the contagion effects of the TPU are minuscule for the financial markets with the exception of certain periods, whereas the stock market played a dominant role followed closely by the commodity (non-energy) market. The spillovers were considerably heightened during the financial crisis of 2008 and COVID-19. Moreover, the financial crisis of 2008 acted as a trigger for the contagion across financial markets and the effects lasted for many years to come. Pairwise and net spillovers further show the dominance of contagion effects of the stock market while oil market remained on the receiving end.

previous article Does financial openness matter for economic transformation in sub-Saharan Africa?

next article Exploring the Fiscal policy—income inequality relationship with Bayesian model averaging analysis

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Davis et al. (2019) http://www.policyuncertainty.com.

Adams Z, Glück T (2015) Financialization in commodity markets: a passing trend or the new normal? J Bank Finance 60:93–111. https://doi.org/10.1016/j.jbankfin.2015.07.008CrossRef

Akhtaruzzaman M, Abdel-Qader W, Hammami H, Shams S (2019) Is China a source of financial contagion? Finance Res Lett. https://doi.org/10.1016/j.frl.2019.101393CrossRef

Alessandria GA, Khan SY, Khederlarian A (2019) Taking stock of trade policy uncertainty: evidence from China’s Pre-WTO accession. NBER working paper series. http://www.nber.org/papers/w25965

Antonakakis N, Chatziantoniou I, Filis G (2014) Dynamic spillovers of oil price shocks and economic policy uncertainty. Energy Economics 44:433–447. https://doi.org/10.1016/j.eneco.2014.05.007CrossRef

Antonakakis N, Gabauer D (2017) Refined measures of dynamic connectedness based on TVP-VAR. MPRA Paper No.78282. https://mpra.ub.uni-muenchen.de/78282/

Awartani B, Maghyereh AI (2013) Dynamic spillovers between oil and stock markets in the gulf cooperation council countries. Energy Econ 36:28–42. https://doi.org/10.1016/j.eneco.2012.11.024CrossRef

Baker SR, Bloom N, Davis SJ, Kost KJ (2019) Nber working paper series policy news and stock market volatility. http://www.policyuncertainty.com/EMV_monthly.html

Baldi L, Peri M, Vandone D (2016) Stock markets’ bubbles burst and volatility spillovers in agricultural commodity markets. Res Int Bus Financ 38:277–285. https://doi.org/10.1016/j.ribaf.2016.04.020CrossRef

Barberis N, Shleifer A, Vishny R (1998) A model of investor sentiment. J Financ Econ 49(3):307–343. https://doi.org/10.1016/S0304-405X(98)00027-0CrossRef

Baruník J, Kočenda E, Vácha L (2016) Asymmetric connectedness on the U.S. stock market: bad and good volatility spillovers. J Financ Mark 27:55–78. https://doi.org/10.1016/j.finmar.2015.09.003CrossRef

Becker KG, Finnerty JE, Friedman J (1995a) Economic news and equity market linkages between the U.S. and U.K. J Bank Finance 19(7):1191–1210. https://doi.org/10.1016/0378-4266(94)00079-ICrossRef

Becker KG, Finnerty JE, Kopecky KJ (1995b) Domestic macroeconomic news and foreign interest rates. J Int Money Financ 14(6):763–783. https://doi.org/10.1016/0261-5606(95)00037-2CrossRef

Berger T, Uddin GS (2016) On the dynamic dependence between equity markets, commodity futures and economic uncertainty indexes. Energy Econ 56:374–383. https://doi.org/10.1016/j.eneco.2016.03.024CrossRef

Bianconi M, Esposito F, Sammon M (2019) Trade policy uncertainty and stock returns. SSRN Electron J. https://doi.org/10.2139/ssrn.3340700CrossRef

Bianconi M, Esposito F, Sammon M (2021) Trade policy uncertainty and stock returns. J Int Money Financ 119:102492. https://doi.org/10.1016/j.jimonfin.2021.102492CrossRef

Boudt K, Paulus ECS, Rosenthal DWR (2017) Funding liquidity, market liquidity and TED spread: a two-regime model. J Emp Finance 43:143–158. https://doi.org/10.1016/j.jempfin.2017.06.002CrossRef

Broadstock DC, Filis G (2014) Oil price shocks and stock market returns: new evidence from the United States and China. J Int Finan Market Inst Money 33:417–433. https://doi.org/10.1016/j.intfin.2014.09.007CrossRef

Broadstock DC, Cao H, Zhang D (2012) Oil shocks and their impact on energy related stocks in China. Energy Econ 34(6):1888–1895. https://doi.org/10.1016/j.eneco.2012.08.008CrossRef

Caggiano G, Castelnuovo E, Figueres JM (2017) Economic policy uncertainty and unemployment in the United States: a nonlinear approach. Econ Lett 151:31–34. https://doi.org/10.1016/j.econlet.2016.12.002CrossRef

Caldara D, Fuentes-Albero C, Gilchrist S, Zakrajšek E (2016) The macroeconomic impact of financial and uncertainty shocks. Eur Econ Rev 88:185–207. https://doi.org/10.1016/j.euroecorev.2016.02.020CrossRef

Caldara D, Iacoviello M, Molligo P, Prestipino A, Raffo A (2020) The economic effects of trade policy uncertainty. J Monet Econ 109:38–59. https://doi.org/10.1016/j.jmoneco.2019.11.002CrossRef

Calice G, Chen J, Williams J (2013) Liquidity spillovers in sovereign bond and CDS markets: an analysis of the Eurozone sovereign debt crisis. J Econ Behav Organ 85:122–143. https://doi.org/10.1016/j.jebo.2011.10.013CrossRef

Changqing L, Chi X, Cong Y, Yan X (2015) Measuring financial market risk contagion using dynamic MRS-Copula models: the case of Chinese and other international stock markets. Econ Model 51:657–671. https://doi.org/10.1016/j.econmod.2015.09.021CrossRef

Chiang TC (2020) US policy uncertainty and stock returns: evidence in the US and its spillovers to the European Union, China and Japan. J Risk Finance 21(5):621–657. https://doi.org/10.1108/JRF-10-2019-0190CrossRef

Connolly RA, Wang FA (2003) International equity market comovements: economic fundamentals or contagion? Pacific Basin Finance J 11(1):23–43. https://doi.org/10.1016/S0927-538X(02)00060-4CrossRef

Creti A, Joëts M, Mignon V (2013) On the links between stock and commodity markets’ volatility. Energy Econ 37:16–28. https://doi.org/10.1016/j.eneco.2013.01.005CrossRef

Crowley M, Meng N, Song H (2018) Tariff scares: trade policy uncertainty and foreign market entry by Chinese firms. J Int Econ 114:96–115. https://doi.org/10.1016/j.jinteco.2018.05.003CrossRef

Davis SJ, Liu D, Sheng XS (2019) Economic policy uncertainty in China since 1949: The view from mainland newspapers. Working paper, 2019. http://www.policyuncertainty.com/china_monthly.html

Demir E, Gozgor G (2018) Does economic policy uncertainty affect tourism? Ann Tour Res 69:15–17. https://doi.org/10.1016/j.annals.2017.12.005CrossRef

Dickey DA, Fuller WA (1979) Distribution of the estimators for autoregressive time series with a unit root. J Am Stat Assoc. https://doi.org/10.2307/2286348CrossRef

Diebold FX, Yilmaz K (2009) Measuring financial asset return and volatility spillovers, with application to global equity markets. Econ J 119(534):158–171. https://doi.org/10.1111/j.1468-0297.2008.02208.xCrossRef

Diebold FX, Yilmaz K (2012) Better to give than to receive: predictive directional measurement of volatility spillovers. Int J Forecast 28(1):57–66. https://doi.org/10.1016/j.ijforecast.2011.02.006CrossRef

Diebold FX, Yilmaz K (2014) On the network topology of variance decompositions: measuring the connectedness of financial firms. Journal of Econometrics. https://doi.org/10.1016/j.jeconom.2014.04.012CrossRef

Elliott G, Rothenberg TJ, Stock JH (1996) Efficient tests for an autoregressive unit root. Econometrica 64(4):813. https://doi.org/10.2307/2171846CrossRef

Faff RW, Brailsford TJ (1999) Oil price risk and the Australian stock market. J Energy Finance Dev 4(1):69–87. https://doi.org/10.1016/S1085-7443(99)00005-8CrossRef

Feng L, Li Z, Swenson DL (2017) Trade policy uncertainty and exports: evidence from China’s WTO accession. J Int Econ 106:20–36. https://doi.org/10.1016/j.jinteco.2016.12.009CrossRef

Gulen H, Ion M (2015) Policy uncertainty and corporate investment. Rev Financ Stud. https://doi.org/10.1093/rfs/hhv050

Handley K, Limão N (2018) Policy uncertainty, trade, and welfare: theory and evidence for China and the United States. Policy Extern Int Trade Agreem 107(9):123–175. https://doi.org/10.1142/9789813147980_0005CrossRef

He F, Lucey B, Wang Z (2020) Trade policy uncertainty and its impact on the stock market-evidence from China-US trade conflict. Finance Res Lett. https://doi.org/10.1016/j.frl.2020.101753CrossRef

Hoque ME, Soo-Wah L, Uddin MA, Rahman A (2023) International trade policy uncertainty spillover on stock market: evidence from fragile five economies. J Int Trade Econ Dev 32(1):104–131. https://doi.org/10.1080/09638199.2022.2072520CrossRef

Imbruno M (2019) Importing under trade policy uncertainty: evidence from China. J Comp Econ. https://doi.org/10.1016/j.jce.2019.06.004CrossRef

Julio B, Yook Y (2012) Political uncertainty and corporate investment cycles. J Financ 67(1):45–83. https://doi.org/10.1111/j.1540-6261.2011.01707.xCrossRef

Kang SH, Yoon SM (2018) Dynamic connectedness network in economic policy uncertainties. Appl Econ Lett 26(1):1–5. https://doi.org/10.1080/13504851.2018.1438580CrossRef

Kang W, Lee K, Ratti RA (2014) Economic policy uncertainty and firm-level investment. J Macroecon 39:42–53. https://doi.org/10.1016/j.jmacro.2013.10.006CrossRef

Kang W, Ratti RA, Yoon KH (2015) The impact of oil price shocks on the stock market return and volatility relationship. J Int Finan Markets Inst Money 34:41–54. https://doi.org/10.1016/j.intfin.2014.11.002CrossRef

Kang SH, McIver R, Yoon S-M (2017) Dynamic spillover effects among crude oil, precious metal, and agricultural commodity futures markets. Energy Econ 62:19–32. https://doi.org/10.1016/j.eneco.2016.12.011CrossRef

Karabulut G, Bilgin MH, Doker AC (2020) The relationship between commodity prices and world trade uncertainty. Econ Anal Policy 66:276–281. https://doi.org/10.1016/j.eap.2020.05.001CrossRef

Koop G, Korobilis D (2014) A new index of financial conditions. Eur Econ Rev 71:101–116. https://doi.org/10.1016/j.euroecorev.2014.07.002CrossRef

Koop G, Pesaran MH, Potter SM (1996) Impulse response analysis in nonlinear multivariate models. J Econom 74(1):119–147. https://doi.org/10.1016/0304-4076(95)01753-4CrossRef

Leduc S, Liu Z (2016) Uncertainty shocks are aggregate demand shocks. J Monet Econ 82:20–35. https://doi.org/10.1016/j.jmoneco.2016.07.002CrossRef

Li C, He C, Lin C (2018) Economic impacts of the possible china–us trade war. Emerg Mark Financ Trade 54(7):1557–1577. https://doi.org/10.1080/1540496X.2018.1446131CrossRef

Liao J, Qian Q, Xu X (2018) Whether the fluctuation of China’s financial markets have impact on global commodity prices? Physica A 503:1030–1040. https://doi.org/10.1016/j.physa.2018.08.035CrossRef

Liu L, Zhang T (2015) Economic policy uncertainty and stock market volatility. Financ Res Lett 15:99–105. https://doi.org/10.1016/j.frl.2015.08.009CrossRef

Liu LX, Shu H, Wei KCJ (2017) The impacts of political uncertainty on asset prices: evidence from the Bo scandal in China. J Financ Econ 125(2):286–310. https://doi.org/10.1016/j.jfineco.2017.05.011CrossRef

Ma X, Zhang Z, Ma X, Shen Y (2019) Measuring cross-category spillovers of policy-specific uncertainty in China. Econ Lett 183:108611. https://doi.org/10.1016/j.econlet.2019.108611CrossRef

Masih R, Peters S, De Mello L (2011) Oil price volatility and stock price fluctuations in an emerging market: evidence from South Korea. Energy Econ 33(5):975–986. https://doi.org/10.1016/j.eneco.2011.03.015CrossRef

Mensi W, Beljid M, Boubaker A, Managi S (2013) Correlations and volatility spillovers across commodity and stock markets: linking energies, food, and gold. Econ Model 32:15–22. https://doi.org/10.1016/j.econmod.2013.01.023CrossRef

Mensi W, Hammoudeh S, Shahzad SJH, Shahbaz M (2017) Modeling systemic risk and dependence structure between oil and stock markets using a variational mode decomposition-based copula method. J Bank Finance 75:258–279. https://doi.org/10.1016/j.jbankfin.2016.11.017CrossRef

Mensi W, Nekhili R, Vo XV, Suleman T, Kang SH (2020) Asymmetric volatility connectedness among US stock sectors. North Am J Econ Finance. https://doi.org/10.1016/j.najef.2020.101327CrossRef

Nguyen CP, Le T-H, Su TD (2020) Economic policy uncertainty and credit growth: evidence from a global sample. Res Int Bus Finance 51:101118. https://doi.org/10.1016/j.ribaf.2019.101118CrossRef

Ouyang R, Zhang X (2020) Financialization of agricultural commodities: evidence from China. Econ Model 85:381–389. https://doi.org/10.1016/j.econmod.2019.11.009CrossRef

Park J, Ratti RA (2008) Oil price shocks and stock markets in the US and 13 European countries. Energy Econ 30(5):2587–2608. https://doi.org/10.1016/j.eneco.2008.04.003CrossRef

Pástor Ľ, Veronesi P (2013) Political uncertainty and risk premia. J Financ Econ 110(3):520–545. https://doi.org/10.1016/j.jfineco.2013.08.007CrossRef

Pesaran HH, Shin Y (1998) Generalized impulse response analysis in linear multivariate models. Econ Lett 58(1):17–29. https://doi.org/10.1016/S0165-1765(97)00214-0CrossRef

Pierce JR, Schott PK (2016) The surprisingly swift decline of US manufacturing employment. Am Econ Rev 106(7):1632–1662. https://doi.org/10.1257/aer.20131578CrossRef

Pindyck R (1990) Irreversibility, uncertainty, and investment. https://doi.org/10.3386/w3307

Roudari S, Sadeghi A, Gholami S, Mensi W, Al-Yahyaee KH (2023) Dynamic spillovers among natural gas, liquid natural gas, trade policy uncertainty, and stock market. Resour Policy 83:103688. https://doi.org/10.1016/j.resourpol.2023.103688CrossRef

Schwarz K (2019) Mind the gap: disentangling credit and liquidity in risk spreads. Rev Finance 23(3):557–597. https://doi.org/10.1093/rof/rfy034CrossRef

Shiller RJ (2014) Speculative asset prices. Am Econ Rev 104(6):1486–1517. https://doi.org/10.1257/aer.104.6.1486CrossRef

Song Y, Zhang X, Hu G (2023) Relationships among geopolitical risk, trade policy uncertainty, and crude oil import prices: Evidence from China. Resour Policy 82:103555. https://doi.org/10.1016/j.resourpol.2023.103555CrossRef

Stein LCD, Wang CCY (2017) Economic uncertainty and earnings management. SSRN Electron J. https://doi.org/10.2139/ssrn.2746091

Sun TT, Su CW, Mirza N, Umar M (2021) How does trade policy uncertainty affect agriculture commodity prices? Pacific Basin Finance J 66:101514. https://doi.org/10.1016/j.pacfin.2021.101514CrossRef

Wang EZ, Lee CC (2020) Dynamic spillovers and connectedness between oil returns and policy uncertainty. Appl Econ 52(35):3788–3808. https://doi.org/10.1080/00036846.2020.1722794CrossRef

Wang E-Z, Lee C-C (2022) The dynamic correlation between China’s policy uncertainty and the crude oil market: a time-varying analysis. Emerg Mark Financ Trade 58(3):692–709. https://doi.org/10.1080/1540496X.2020.1837106CrossRef

Wang P, Zong L (2019) Contagion effects and risk transmission channels in the housing, stock, interest rate and currency markets: an empirical study in China and the US. North Am J Econ Finance. https://doi.org/10.1016/j.najef.2019.101113CrossRef

Wei Y (2019) Oil price shocks, economic policy uncertainty and China’s trade: a quantitative structural analysis. North Am J Econ Finance 48:20–31. https://doi.org/10.1016/j.najef.2018.08.016CrossRef

Zhang D, Lei L, Ji Q, Kutan AM (2019a) Economic policy uncertainty in the US and China and their impact on the global markets. Econ Model 79:47–56. https://doi.org/10.1016/j.econmod.2018.09.028CrossRef

Zhang W, Zhuang X, Lu Y (2019b) Spatial spillover effects and risk contagion around G20 stock markets based on volatility network. North Am J Econ Finance. https://doi.org/10.1016/j.najef.2019.101064CrossRef

Title: Does trade policy uncertainty in China and USA matter for key financial markets?
Authors: Adeel Riaz
Assad Ullah
Li Xingong
Publication date: 01-04-2024
Publisher: Springer US
Published in: Economic Change and Restructuring / Issue 2/2024
Print ISSN: 1573-9414
Electronic ISSN: 1574-0277
DOI: https://doi.org/10.1007/s10644-024-09613-0

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Other articles of this Issue 2/2024

The intersection of China’s rural economy, renewable energy, and carbon neutrality

Dynamic connectedness of economic policy uncertainty in G7 countries and the influence of the USA and UK on non-G7 countries

Greening the bottom line: navigating legal and financial dimensions of energy digital transition in the modern economy

Does the Yangtze River Protection Strategy help heavily polluting corporates deleverage? Evidence from corporates in the Yangtze River Economic Belt

The moderating role of financial development in the nexus between population aging and saving

Sustainable energy utility investment role in energy transformation progress: case of Mongolia

Premium Partner