U.S. TRADE POLICY UNCERTAINTY AND EMERGING AND FRONTIER MARKETS RETURNS

Abstract

This paper examines how U.S. Trade Policy Uncertainty (TPU) shocks affect emerging and frontier market stock returns across four major regions during the Trump I, Biden and Trump II presidential administrations. Using a time-varying parameter vector autoregressive (TVP-VAR) connectedness framework, significant regional variation in the influence of market development status on TPU transmission is documented. Frontier markets in Asia and Latin America exhibit greater sensitivity than their emerging counterparts, whereas in Europe, the opposite holds, with emerging markets demonstrating greater TPU connectedness. The emerging-frontier differential is not stable over time, as it narrows during the Biden administration and widens again under Trump II, with Asian frontier markets showing particularly pronounced increases in connectedness as their integration into U.S.-facing supply chains deepened over the sample period. These findings suggest that market development classification, while meaningful, is an insufficient guide to TPU risk, and that regional context and the prevailing policy environment are essential inputs for both portfolio diversification and policy design.