How Does Trade Policy Uncertainty Affect Investor Sentiment?

For decades, the United States has committed to economic integration, but Trump’s anti-globalization policies have been challenging this commitment and raised concerns and uncertainty about global trade. Hence, we are interested in investigating how that uncertainty affects investor sentiment. This paper uses the S&P 500 index as a proxy for the market and follows the methodology in Bijl et al. (2016) to compute an investor sentiment index by searching company names listed on the S&P 500 index from 2010 to 2019 on Google Trends. Building upon existing literature, this paper proposes a new model that explains the relationship between trade policy uncertainty and investor attention. It is shown that these two variables are positively correlated. Since Google Trends only display the popularity of searches, but cannot reveal the actual sentiment of people who made these searches, this can be interpreted as investors are curious to learn more about companies that they are interested in as the uncertainty increases. Hence, investors are likely to educate themselves in terms of financial knowledge when the forecast is worrisome. This causal flow from TPU to investor attention is also confirmed by a Granger Causality Test.