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The Impact of Trade Policy on Financial Markets Evidence from the U.S

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The Impact of Trade Policy on Financial Markets Evidence from the U.S School of Business and Economics The Impact of Trade Policy on Financial Markets Evidence from the U.S. – China Trade War — Alexander Podolski Master’s Thesis in Business Administration - May 2019 ii Foreword and Acknowledgements The seeds of this thesis were planted over fourteen months ago, at the very start of the U.S. - China trade war. My journey towards attaining a master‟s degree has taken me across many different areas of economics, but none more exciting than the area of finance. One of the unique aspects of finance is its application of knowledge from other areas of discipline. The interaction between asset prices and economic variables such as interest rates, inflation and oil price was of particular interest to me. It was no accident that I chose to study the interaction between two of the world‟s largest economies and its impact on financial markets, any more than writing this foreword was an accident. I began my research in earnest in January of 2019, completing this project five months and over ninety pages later. This thesis is considerably longer than I had originally planned, but I have finally overcome the temptation to include “just one more observation”, and have put my pen to rest. Of course, the trade dispute has evolved rapidly while I have been writing, and it continues to do so even as this thesis approaches its final stage. My objective was to leave no stone unturned, and provide broad coverage. However, there are many subjects that I do not touch upon, and many others that I can only mention in passing. I would like to thank my supervisors Espen Sirnes and Torun Fretheim from the University of Tromsø for their support and encouragement throughout this period. iii Abstract The objective of this thesis was to assess the impact of the U.S. – China trade war on financial markets. By utilizing event study methodology, research has analyzed the reactions of various financial data to tariffs and trade-related announcements. The results suggest a significant impact of both positive and negative trade-related news on stocks, debt securities and stock market volatility. The study goes into detail on how the reactions differ across different major indices, market sectors, capitalizations and U.S. treasury yields. ―The Impact of Trade Policy on Financial Markets: Evidence from the U.S.–China Trade War‖ Keywords: event study, trade war, tariff, trade, policy, stocks, bonds, debt, yields, volatility iv Figure list Figure 1: Event Study Timeline ................................................................................................... 10 Figure 2: Results for major indices using a 3-day event window, negative developments ......... 37 Figure 3: Results for major indices using a 3-day event window, positive developments .......... 37 Figure 4: Results for major indices using a 21-day event window, negative developments ....... 39 Figure 5: Results for major indices using a 21-day event window, positive developments ........ 39 Figure 6: Results for sectors using a 3-day event window, negative developments ................... 45 Figure 7: Results for sectors using a 3-day event window, positive developments .................... 46 Figure 8: Results for sectors using a 21-day event window, negative developments ................. 49 Figure 9: Results for sectors using a 21-day event window, positive developments .................. 50 Figure 10: Results for market caps using a 3-day event window, negative developments ......... 54 Figure 11: Results for market caps using a 3-day event window, positive developments .......... 54 Figure 12: Results for market caps using a 21-day event window, negative developments ....... 56 Figure 13: Results for market caps using a 21-day event window, positive developments ........ 56 Figure 14: Results for treasury yields using a 3-day event window, negative developments ..... 60 Figure 15: Results for treasury yields using a 3-day event window, positive developments ...... 60 Figure 16: Results for treasury yields using a 21-day event window, negative developments ... 62 Figure 17: Results for treasury yields using a 21-day event window, positive developments .... 62 Figure 18: Results for VIX using a 3-day event window, negative developments ..................... 65 Figure 19: Results for VIX using a 3-day event window, positive developments ...................... 65 Figure 20: Results for VIX using a 21-day event window, negative developments ................... 67 Figure 21: Results for VIX using a 21-day event window, positive developments .................... 67 v Table list Table 1: Results for every major index analyzed separately for each date ................................. 34 Table 2: Aggregated results for major indices using a 3-day event window, bad news ............. 36 Table 3: Aggregated results for major indices using a 3-day event window, good news ........... 36 Table 4: Aggregated results for major indices using a 21-day event window, bad news ........... 38 Table 5: Aggregated results for major indices using a 21-day event window, good news ......... 38 Table 6: Results for every sector analyzed separately for each date ........................................... 40 Table 7: Aggregated results for sectors using a 3-day event window, bad news ........................ 44 Table 8: Aggregated results for sectors using a 3-day event window, good news ...................... 44 Table 9: Aggregated results for sectors using a 21-day event window, bad news ...................... 47 Table 10: Aggregated results for sectors using a 21-day event window, good news .................. 48 Table 11: Results for markets caps analyzed separately for each date ........................................ 51 Table 12: Aggregated results for market caps using a 3-day event window, bad news .............. 53 Table 13: Aggregated results for market caps using a 3-day event window, good news ............ 53 Table 14: Aggregated results for market caps using a 21-day event window, bad news ............ 55 Table 15: Aggregated results for market caps using a 21-day event window, good news .......... 55 Table 16: Results for all treasury yields analyzed separately for each date ................................ 57 Table 17: Aggregated results for treasury yields using a 3-day event window, bad news .......... 58 Table 18: Aggregated results for treasury yields using a 3-day event window, good news ....... 58 Table 19: Aggregated results for treasury yields using a 21-day event window, bad news ........ 61 Table 20: Aggregated results for treasury yields using a 21-day event window, good news ..... 61 Table 21: Results for VIX analyzed separately for each date ..................................................... 63 Table 22: Aggregated results for volatilty using a 3-day event window, bad news .................... 64 Table 23: Aggregated results for volatilty using a 3-day event window, good news ................. 64 Table 24: Aggregated results for volatilty using a 21-day event window, bad news .................. 66 Table 25: Aggregated results for volatilty using a 21-day event window, good news ............... 66 vi Contents Foreword and Acknowledgements ............................................................................................iii Abstract ....................................................................................................................................... iv Figure List .................................................................................................................................... v Table List ..................................................................................................................................... vi Contents ...................................................................................................................................... vii 1. Introduction ............................................................................................................................. 1 1. 1 Background ......................................................................................................................... 1 1. 2 Research Question .............................................................................................................. 4 2. Theoretical Framework .......................................................................................................... 5 2.1 Efficient Markets Hypothesis .............................................................................................. 5 2.2 Behavioral Finance .............................................................................................................. 7 3. Methodology ............................................................................................................................. 8 3. 1 Event Study ......................................................................................................................... 8 3. 2 Procedure ............................................................................................................................ 9 3. 3 Criticism ............................................................................................................................ 16 4. Dataset .................................................................................................................................... 17 4. 1 Major Indices .................................................................................................................... 18
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