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Can U.S. trade policy uncertainty help in predicting stock market excess return?

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  • Li, Dakai
  • Zhang, Fan
  • Li, Xuezhi

Abstract

This study mainly sheds additional light on the role of U.S. trade policy uncertainty in forecasting equity premium. Theoretically, the trade policy uncertainty can exert a negative impact on stock market and economic system from exporter/importer and investor sentiment channels. Our empirical results show that the trade policy uncertainty can successfully predict the U.S. equity premium. Furthermore, we find that the superior forecasting performance of trade policy uncertainty is reflected in the period of recession.

Suggested Citation

  • Li, Dakai & Zhang, Fan & Li, Xuezhi, 2022. "Can U.S. trade policy uncertainty help in predicting stock market excess return?," Finance Research Letters, Elsevier, vol. 49(C).
    • Handle: RePEc:eee:finlet:v:49:y:2022:i:c:s1544612322003592
    DOI: 10.1016/j.frl.2022.103136
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    References listed on IDEAS

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    1. Ivo Welch & Amit Goyal, 2008. "A Comprehensive Look at The Empirical Performance of Equity Premium Prediction," The Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1455-1508, July.
    2. He, Feng & Lucey, Brian & Wang, Ziwei, 2021. "Trade policy uncertainty and its impact on the stock market -evidence from China-US trade conflict," Finance Research Letters, Elsevier, vol. 40(C).
    3. Phan, Dinh Hoang Bach & Sharma, Susan Sunila & Tran, Vuong Thao, 2018. "Can economic policy uncertainty predict stock returns? Global evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 55(C), pages 134-150.
    4. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    5. Bekiros, Stelios & Gupta, Rangan & Majumdar, Anandamayee, 2016. "Incorporating economic policy uncertainty in US equity premium models: A nonlinear predictability analysis," Finance Research Letters, Elsevier, vol. 18(C), pages 291-296.
    6. repec:eme:cfripp:cfri-04-2018-0032 is not listed on IDEAS
    7. John Y. Campbell & Samuel B. Thompson, 2008. "Predicting Excess Stock Returns Out of Sample: Can Anything Beat the Historical Average?," The Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1509-1531, July.
    8. Ma, Feng & Wang, Ruoxin & Lu, Xinjie & Wahab, M.I.M., 2021. "A comprehensive look at stock return predictability by oil prices using economic constraint approaches," International Review of Financial Analysis, Elsevier, vol. 78(C).
    9. Ma, Feng & Lu, Xinjie & Liu, Jia & Huang, Dengshi, 2022. "Macroeconomic attention and stock market return predictability," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 79(C).
    10. David E. Rapach & Jack K. Strauss & Guofu Zhou, 2010. "Out-of-Sample Equity Premium Prediction: Combination Forecasts and Links to the Real Economy," The Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 821-862, February.
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    Cited by:

    1. Chien-Chiang Lee & Farzan Yahya, 2024. "Have Dynamic Spillovers and the Connectedness of Trade Policy Uncertainty Changed During the COVID-19 Pandemic and Sino-US Trade Frictions?," Working Papers DP-2023-35, Economic Research Institute for ASEAN and East Asia (ERIA).
    2. Hong, Yun & Zhang, Rushan & Zhang, Feipeng, 2024. "Time-varying causality impact of economic policy uncertainty on stock market returns: Global evidence from developed and emerging countries," International Review of Financial Analysis, Elsevier, vol. 91(C).

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