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Ripples into waves: trade networks, economic activity, and asset prices

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  • Chang, Jeffery (Jinfan)
  • Du, Huancheng
  • Lou, Dong
  • Polk, Christopher

Abstract

We exploit information in sovereign CDS spreads and the international trade network to provide causal evidence of the propagation of global economic shocks. We show that trade links are an important source of shock transmission using the natural experiments of the Japanese tsunami and the COVID-19 lockdown in China. We then confirm more general and gradual information flows along the trade network by showing extensive country-level credit/equity cross-sectional return predictability. News about country fundamentals flows primarily from importers to exporters, depends on both direct and indirect links in the trade network, and is magnified by the exporting country's financial vulnerability.

Suggested Citation

  • Chang, Jeffery (Jinfan) & Du, Huancheng & Lou, Dong & Polk, Christopher, 2022. "Ripples into waves: trade networks, economic activity, and asset prices," LSE Research Online Documents on Economics 110838, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:110838
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    Cited by:

    1. Naeem, Muhammad Abubakr & Chatziantoniou, Ioannis & Gabauer, David & Karim, Sitara, 2024. "Measuring the G20 stock market return transmission mechanism: Evidence from the R2 connectedness approach," International Review of Financial Analysis, Elsevier, vol. 91(C).

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    More about this item

    Keywords

    sovereign CDS; return predictability; trade networks; limited attention; information aggregation; 71; 733; 004; Paul Woolley Center;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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