Trade Policy Uncertainty, Market Return, and Expected Return Predictability

Frederick Adjei¹ and Mavis Adjei^2,

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

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

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

Abstract

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.

Keywords:
Trade Policy Uncertainty

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