In times of an increasingly digitalized world, behavioral changes in society do not spare high-ranking politicians and decision makers. In some cases, those changes in behavior can have unforeseen yet considerable consequences. By making use of the renowned event study methodology, this paper scrutinizes the impact of acting U.S. president Donald Trump’s Twitter activity on international stock markets. In particular, a select set of ten short messages posted in the context of the present US-China trade dispute is analyzed with regard to the U.S. American S&P 500, the Chinese Hang Seng Index (HSI) and the German DAX.
Highly significant market reactions, both positive and negative, are found for the HSI and the examined markets’ aggregate, while Trump’s native market showed the least responsiveness to his tweets. Apart from that, the obtained results suggest a fairly rapid processing of new information and thus adjustment of prices.
Ever since Donald Trump’s official inaugural address as the 45th president of the United States of America in January 2017, he has been cherishing a very polarizing and distinct way of leading the world’s largest economy compared to his more recent predecessors. That leadership style is not least characterized by his preferred yet – considering his position – rather uncommon way of communicating to the outside world, namely his extensive use of microblogging service Twitter for presidential announcements and commentaries of any nature. Amongst others, a particularly high activity can be observed
in conjunction with the rising political and economic tensions between the United States and China that have been intensifying over Trump’s course of presidency.
The dispute between the two economic superpowers – it comprises various topics such as the United States’ massive and long-standing trade deficit and alleged intellectual property theft – ultimately lead to the imposition of a series of mutual tariffs worth hundreds of billions of U.S. dollars. And while Trump regularly keeps his followers updated about his thoughts, claims and the statuses of trade negotiations, stock markets around the globe seem to react heavily to the developments of what is referred to as the US-China trade war. The question arises whether those unscheduled and seemingly impulsive short messages can be a causal explanation for recent stock market movements.
Table of Contents
1 Introduction
2 Literature review
2.1 Financial markets’ reaction to new information
2.2 The impact of macroeconomic announcements on U.S. stock markets
3 Event Study
3.1 Event Review – the US-China trade war
3.1.1 Emergence and sources of conflict
3.1.2 Development and imposed tariffs
3.2 Methodology and theoretical framework
3.2.1 Assumptions
3.2.2 Event definition and selection criteria
3.2.3 Event window, post-event window and estimation window
3.2.4 Expected return models and (cumulative) abnormal returns
3.2.5 Null hypothesis and statistical validation
3.3 Data description
4 Discussion of results
4.1 Events’ impacts on aggregated stock market valuations
4.2 Events’ impacts on stock markets on a country level
4.2.3 U.S. American stock market – S&P 500
4.2.4 Chinese stock market – Hang Seng Index
4.2.5 German stock market – DAX
4.3 Overview and conclusion
4.4 Quality of the study and limitations
5 Conclusion and areas of future research
Objectives and Research Themes
This thesis examines the impact of Donald Trump’s Twitter activity concerning the US-China trade dispute on international stock market indices (S&P 500, HSI, and DAX) to determine if impulsive social media messages act as a causal driver for market movements.
- Application of the event study methodology to assess market responsiveness to presidential tweets.
- Categorization of tweets into positive, negative, and neutral sentiment classes.
- Comparative analysis of stock market reactions across the United States, China, and Germany.
- Evaluation of market efficiency and the speed of information processing in modern financial markets.
Excerpt from the Book
3.1.1 Emergence and sources of conflict
On August 14, 2017, president Donald Trump (p. 1) wrote in a memorandum to the Office of the United States Trade Representative8 (USTR):
“China has implemented laws, policies, and practices and has taken actions related to intellectual property, innovation, and technology that may encourage or require the transfer of American technology and intellectual property to enterprises in China or that may otherwise negatively affect American economic interests.”
He subsequently instructed the government agency to determine whether to investigate those circumstances under Section 301 of the U.S. Trade Act of 19749. Said investigation was initiated shortly thereafter, and yielded the formal argumentative basis for the first round of tariffs on behalf of the United States. Amongst others, USTR (2018) confirmed both regulatory and administrative restrictions on foreign investments on the part of China with the purpose to pressure companies into transferring technology, as well as government backed cyber-attacks into U.S. commercial networks. By gaining unauthorized access to a wide range of sensitive information for over a decade, China had committed theft of intellectual property and other confidential business information. In consequence of those allegations, Trump regularly refers to the U.S.’ massive and long-standing trade deficit – it accumulated to a total of $375.4 Bn. by the end of 2017 and even $419.5 Bn. by the end of 2018 (United States Census Bureau, n.d.; see Appendix A) – as a result of unfair trade practices exercised by China.
Summary of Chapters
1 Introduction: This chapter introduces the rise of presidential communication via Twitter and outlines the research objective of analyzing the causal link between Trump's trade-related tweets and global stock market volatility.
2 Literature review: This section provides a theoretical foundation by discussing the efficient-market hypothesis (EMH), random walk theory, and the documented impact of macroeconomic announcements on asset prices.
3 Event Study: This chapter reviews the US-China trade war, defines the methodological framework including event windows and return models, and describes the data collection process.
4 Discussion of results: This section evaluates the findings across the aggregate market level and country-specific indices, identifying patterns of responsiveness and testing for statistical significance.
5 Conclusion and areas of future research: This final chapter summarizes the results, confirming significant market impacts, and suggests future research directions, particularly focusing on behavioral finance.
Keywords
Event study, Donald Trump, Twitter, US-China trade war, Stock market, S&P 500, Hang Seng Index, DAX, Efficient-market hypothesis, Abnormal return, Trade tariffs, Sentiment analysis, Financial markets, Asset pricing, Behavioral finance
Frequently Asked Questions
What is the core focus of this research?
The paper examines whether unscheduled, impulsive tweets from U.S. President Donald Trump regarding the US-China trade war influence international stock market valuations.
Which stock markets are analyzed in this study?
The study analyzes the U.S. American S&P 500, the Chinese Hang Seng Index (HSI), and the German DAX.
What is the primary goal of this thesis?
The goal is to determine if market participants perceive presidential tweets as significant news that causes abnormal returns, thereby testing market efficiency in the context of social media communication.
Which methodology is employed?
The author utilizes an event study methodology to measure the impact of ten selected tweets on asset prices, using a constant-mean-return model (CMRM) to calculate abnormal returns.
What topics are covered in the main body?
The main body covers the development of the US-China trade conflict, the theoretical framework for the event study, and a detailed discussion of the results for each index and the aggregated market.
Which keywords best describe the research?
Key terms include Event study, stock market reaction, sentiment analysis, efficient-market hypothesis, and presidential communication.
How does the Hang Seng Index differ in its reaction from the S&P 500?
The study finds that the HSI shows higher responsiveness and significant reactions to all classes of tweets, including neutral ones, whereas the S&P 500 (Trump’s native market) appears the least responsive.
What role does the DAX play in this study?
The DAX serves as a proxy for the German market, acting as an important intercontinental trade partner for both the U.S. and China, and demonstrating moderate market responsiveness compared to the other two indices.
- Quote paper
- Max Luca Wiegand (Author), 2019, The Stock Market Reaction to Presidential Tweets in the Case of the US-China Trade War, Munich, GRIN Verlag, https://www.grin.com/document/511509
