External trade policy uncertainty, corporate risk exposure, and stock market volatility

Abstract

The increasing uncertainty surrounding China's external trade policies significantly escalates the adverse effects on firms' exports and operational management. This uncertainty amplifies corporate stock price volatility, thus challenging stock market stability. This study examines the influence of external trade policy uncertainty on the risk exposure of Chinese firms and stock market stability. We find that in the short term, shocks from external trade policy uncertainty increase Chinese firms' risk exposure and intensify stock market volatility; however, these adverse effects do not persist long term. The results also indicate that although short-term market sentiment fluctuations lead to temporary declines in stock market stability, the absence of significant long-term declines in corporate performance underpins the market's fundamental stability. Chinese firms intensify their research and development investments and enhance their product quality to diminish the negative effects of external trade policy uncertainty.