International trade policy uncertainty spillover on stock market: Evidence from fragile five economies

Trade policy uncertainty (TPU) and its impact on the global economy have captured much attention of the policymakers in the last decade. This paper contributes to building an emerging literature strand by investigating TPU spillovers of United States, China, and Japan on stock returns and volatilities of fragile economies, namely, Colombia, Indonesia, Mexico South Africa, and Turkey. This study confirms the existence of spillover effects employing Diebold and Yilmaz's (2012) methodology. The results show that USA and China are net shock transmitter of TPU, while Japan is a net receiver. Chinese TPU has the largest influence among the three countries followed by USA and Japan. This study also employs vector autoregression (VAR)-DCC-GARCH and VAR-ADCC-GARCH to capture the spillover effects on stock returns and volatility. We find that TPU of USA, China, and Japan transmits shocks that drive stock market returns of fragile economies. However, the sign of the spillover effects is country specific and depends on a country's TPU. Similar evidence was found for volatility spillover. In few cases, TPU of USA, China, and Japan stabilizes the stock market returns volatility. Hence, TPU has heterogeneous effects on stock market in Colombia, Indonesia, Mexico South Africa, and Turkey.