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The Effect of US-China Trade War on the US and Chinese Stock Markets

  • Journal of Asia-Pacific Studies
  • Abbr : JAPS
  • 2020, 27(4), pp.5-27
  • DOI : 10.18107/japs.2020.27.4.001
  • Publisher : Institute of Global Affairs
  • Research Area : Social Science > Social Science in general
  • Received : August 25, 2020
  • Accepted : November 26, 2020
  • Published : December 30, 2020

Jinho Jeong 1 Siqi Chen 2 Geesun Lee 3

1고려대학교
2고려대
3유진자산운용

Accredited

ABSTRACT

This study provides an empirical analysis of the US-China trade war impacts on its stock markets. Using 20 years of daily return series of S&P 500 and SSE Composite Indices from 2000 and 2019, we investigate volatility clustering, asymmetric volatility under EGARCH and TGARCH models that effectively captures the time-varying volatility in the pre- and the post-trade war eras. We found the following results. First, volatility clustering is significant during the pre-trade war period for both the US and Chinese stock markets. However, the level of clustering was increased in the US and decreased in China during the post-trade war period, implying that the US stock market responded more sensitive relative to Chinese stock market. Second, the volatility persistence in US was decreased while it was increased in China during the US-China trade war period. The results suggest that US Federal Reserve’s active stabilization policies help quickly absorb the trade war shock. Third, the presence of asymmetric volatility in the pre-trade war period was identified both in the US and Chinese stock markets. However, the degree of asymmetry in China is lower than that of US. More importantly, in China, asymmetric volatility is not significant in the post-trade war period, suggesting the insensitive responses of Chinese investors to debt ratio and risk premium increase during the market turmoil. Finally, the possibility of adverse asymmetric volatility in Chinese stock market is discovered during the trade war period, suggesting that Chinese investors respond more sensitively to good news than bad news. Overall, the government’s active engagement seems to be effective for market stabilization during the market turbulence in US. In addition, we found the possibility of speculative investment increase in China because of adverse asymmetric volatility in Chinese stock market.

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