Market volatility under trade policy uncertainty: GARCH evidence from Trump's 2025 tariff announcements

This is the authors' abstract. We don't add key points for this paper.

Purpose This study examines how multilateral trade policy uncertainty (TPU), i.e. simultaneous tariff threats against several trading partners, affects US stock market volatility. Unlike prior work on bilateral disputes, it focuses on the compound uncertainty created by the April 2025 tariff announcements under former President Trump and on how responses vary across sectors with different global trade exposures. Design/methodology/approach Generalized Autoregressive Conditional Heteroskedasticity (GARCH) and Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) models are estimated on daily returns for the S&P 500 and three sectoral indices (technology XLK, industrials XLI, utilities XLU) from January to April 2025. Tariff-announcement dummies capture policy shocks, ANOVA tests compare volatility persistence across sectors and models are estimated by quasi-maximum likelihood with robust standard errors. Findings Tariff announcements raised volatility sharply: S&P 500 conditional volatility doubled from 0.8% to 1.6% within five days, with a 23-day half-life. Responses were heterogeneous, with persistence of 0.96 and 0.93 for technology and industrials versus 0.72 for utilities, and ANOVA rejected equality across sectors. EGARCH results show asymmetry: negative shocks raise volatility by 0.14%, while equivalent positive shocks reduce it by only 0.06%, consistent with the leverage effect and loss aversion. Practical implications During trade disputes, investors should rebalance toward domestic-oriented sectors, while policymakers should favor gradual and clear communication of trade measures to limit adverse market effects, especially in globally integrated sectors. Originality/value The paper offers early evidence on multilateral TPU and a framework for its transmission, showing that simultaneous, multipartner tariff threats generate compound uncertainty and volatility persistence beyond those documented for bilateral trade disputes.