A cross-country analysis

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School of Business | Bachelor's thesis
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Authors

Date

2020

Department

Mikkelin kampus

Major/Subject

Mcode

Degree programme

(Mikkeli) Bachelor’s Program in International Business

Language

en

Pages

74+10

Series

Abstract

Objectives This paper seeks to evaluate the causes of the commercial trade war and unusual practices of central banks under political pressures. Such reactions from the governments then facilitate an investigation of whether their protectionist policies increased the volatility of domestic and international equity markets. Potential transmission channels are simultaneously assessed that could explain how the spillovers are established. Summary A review of literature and tariff data reveals technical details of the trade war, including the RMB manipulation, changes of policy rates of the FED, and tariff imposition. The thesis applies conditional volatility model EGARCH, enhanced with exogenous variables, to the broad-based US and Chinese equity indices in order to capture trade-retaliation effects. Conclusions The trade war contributes to negative asset returns and heightened equity market volatility through an uncertainty channel. The market responds stronger to bearish, rather than bullish political announcements, consistent with the investor-induced hypothesis. Changes in the USD/CNY exchange rate have a significant impact on stock volatility. Further, interest rates of the FED are found to be ineffectual in increasing/reducing volatility. Import tariffs, notably, play no vital role in influencing the stock volatility domestically. Nevertheless, their effects on the volatility of foreign markets are substantial.

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Thesis advisor

Stepanov, Roman

Keywords

trade war, protectionism, currency manipulation, FED, equity, volatility, EGARCH, China, USA

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https://urn.fi/URN:NBN:fi:aalto-202005103082

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[kand] Kauppakorkeakoulu / BIZ