Journal of Finance and Economics
ISSN (Print): 2328-7284 ISSN (Online): 2328-7276 Website: Editor-in-chief: Suman Banerjee
Open Access
Journal Browser
Journal of Finance and Economics. 2021, 9(3), 106-114
DOI: 10.12691/jfe-9-3-2
Open AccessArticle

Trade Policy Uncertainty, Market Return, and Expected Return Predictability

Frederick Adjei1 and Mavis Adjei2,

1Economics and Finance Department, Southeast Missouri State University, Cape Girardeau, USA

2Department of Marketing and Management, Southern Illinois University, Carbondale, USA

Pub. Date: June 15, 2021

Cite this paper:
Frederick Adjei and Mavis Adjei. Trade Policy Uncertainty, Market Return, and Expected Return Predictability. Journal of Finance and Economics. 2021; 9(3):106-114. doi: 10.12691/jfe-9-3-2


Using the Trade Policy Uncertainty (TPU) index as a proxy for the level of trade policy uncertainty in the U.S. economy, we study the impact of the level of trade policy uncertainty on the conditional mean of market returns. Additionally, we investigate the predictive power of trade policy uncertainty on future market returns. Our findings show that after accounting for business cycle effects, TPU does not impact contemporaneous market returns. However, TPU is a robust predictor of future market returns in both univariate and bivariate regression tests. Specifically, our findings present unequivocal evidence of a positive relation between TPU and expected market returns.

Trade Policy Uncertainty

Creative CommonsThis work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit


[1]  Handley, K., Limao, N., (2015). Trade and investment under policy uncertainty: theory and firm evidence. American Economic Journal: Economic Policy 7 (4), 189-222.
[2]  Pierce, J. R. and Schott, P. K., (2016). The surprisingly swift decline of us manufacturing employment, The American Economic Review, 106 (7), 1632-1662.
[3]  Bianconi Marcelo, Esposito Federico and Sammon Marco, (2019). Trade Policy Uncertainty and Stock Returns, Discussion Papers Series, Department of Economics, Tufts University 0830, Department of Economics, Tufts University.
[4]  Baker, Scott, Bloom Nicholas and Davis Steven J., (2016). Measuring Economic Policy Uncertainty, Quarterly Journal of Economics, 131(4), 1593-1636.
[5]  Pastor, L., and Veronesi, P., (2012). Uncertainty about government policy and stock prices, Journal of Finance, 67 (4), 1219-1264.
[6]  Bernanke, B. (1983). Irreversibility, uncertainty and cyclical investment, Quarterly Journal of Economics, 98, 85-106.
[7]  Caliendo L. and Parro F., (2015). Estimates of the Trade and Welfare Effects of NAFTA, The Review of Economic Studies, 82(1), 1-44.
[8]  Blaum Joaquin , Lelarge Claire , and Peters Michael , (2018). The Gains from Input Trade with Heterogeneous Importers, American Economic Journal: Macroeconomics, 10(4): 77-127.
[9]  Huang, Yi, Lin Chen and Liu, Sibo and Tang, Heiwai, (2019). Trade Networks and Firm Value: Evidence from the US-China Trade War, working paper.
[10]  Antràs P., Fort Teresa C. and Tintelnot Felix, (2017). The Margins of Global Sourcing: Theory and Evidence from US Firms, American Economic Review, American Economic Association, 107(9), 2514-2564.
[11]  Pastor, L., and Veronesi, P., (2013). Political uncertainty and risk premia, Journal of Financial Economics, 110 (3), 520-545.
[12]  Brandt Loren, Van Biesebroeck Johannes, Wang Luhang and Zhang Yifan, (2017). WTO Accession and Performance of Chinese Manufacturing Firms, American Economic Review, American Economic Association, 107(9), 2784-2820.
[13]  Coelli F. (2018). Trade Policy Uncertainty and Innovation: Evidence from China. Working paper.
[14]  Greenland, A., Iony, M., Lopresti, J., and Schott, P., (2019). Using equity market reactions to infer exposure to trade liberalization, working paper.
[15]  Pierce, J. R. and Schott, P. K., (2017). Investment responses to trade liberalization: Evidence from us industries and plants. Tech. rep., National Bureau of Economic Research.
[16]  Steinberg Joseph. (2019). Brexit and the Macroeconomic Impact of Trade Policy Uncertainty, working paper.
[17]  Bernanke, Ben and Kuttner Kenneth N. (2005). What Explains the Stock Market’s Reaction to Federal Reserve Policy? Journal of Finance, 60, 1221-1257.
[18]  Baker, Malcolm, and Wurgler Jeffrey, (2006). Investor Sentiment and the Cross-Section of Stock Returns, Journal of Finance, 61, 1645-1680.
[19]  Caldara, Dario, Iacoviello Matteo, Molligo Patrick, Prestipino Andrea, and Raffo Andrea, (2019). The Economic Effects of Trade Policy Uncertainty, International Finance Discussion Papers 1256.
[20]  Merton, R.C., (1980). On estimating the expected return on the market: An exploratory investigation, Journal of Financial Economics 8, 323-361.
[21]  Nyberg, H., (2012). Risk–return tradeoff in U.S. stock returns over the business cycle, Journal of Financial and Quantitative Analysis, 47, 137-158.
[22]  Stambaugh, R., (1988). The information in forward rates: Implications for models of the term structure, Journal of Financial Economics, 21 (1), 41-70.
[23]  Fama E. F., French K. R., (1989). Business conditions and expected returns on stocks and bonds, Journal of Financial Economics 25, 23-49.
[24]  Friedman, Milton, (1968). The role of monetary policy, American Economic Review 58, 1-17.
[25]  Higgs, R., (1997). Regime Uncertainty: Why the Great Depression Lasted so Long and Why Prosperity Resumed After the War. The Independent Review 1 (4), 561-590.
[26]  Hassett, Kevin, and Metcalf Gilbert, (1999). Investment with Uncertain Tax Policy: Does Random Tax Policy Discourage Investment? Economic Journal, 109, 372-93.
[27]  Boudoukh, Jacob and Richardson, Matthew P. and Whitelaw, Robert F.,(2008). The Myth of Long-Horizon Predictability, The Review of Financial Studies, 21(4), 1577-1605.
[28]  Cochrane John H., (2008). The dog that did not bark: A defense of return predictability, Review of Financial Studies, 21 (4), 1533-1575.
[29]  Li, Y., Ng, D., and Swaminathan, B., (2013). Predicting market returns using aggregate implied cost of capital, Journal of Financial Economics, 110 (2), 419-436.
[30]  Hansen, Lars Peter, (1982). Large Sample Properties of Generalized Method of Moments Estimators, Econometrica, 50(4), 1029-1054.
[31]  Richardson, M. and Stock J.H., (1989). Drawing inferences from statistics based on multiyear asset returns, Journal of Financial Economics 25, 323-348.
[32]  Santa-Clara, P. and Valkanov R., (2003). The presidential puzzle: Political cycles and the stock market. The Journal of Finance 58 (5), 1841-1872.
[33]  Boudoukh, J., Michaely, R., Richardson, M., and Roberts, M., (2007). On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing. The Journal of Finance, 62(2), 877-915.