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Journal of Financial Economics Vol. 145 No. 1 2022

Ripples into waves: Trade networks, economic activity, and asset prices

Jeffery (Jinfan) Chang1; Huancheng Du2; Dong Lou3,4; Christopher Polk3,4

1 Chinese University of Hong Kong, Shenzhen · 2 Central University of Finance and Economics · 3 London School of Business and Finance · 4 London School of Economics and Political Science

open access

Abstract

We exploit information in sovereign CDS spreads and the international trade network to provide causal evidence of the propagation of global economic shocks. We show that trade links are an important source of shock transmission using the natural experiments of the Japanese tsunami and the COVID-19 lockdown in China. We then confirm more general and gradual information flows along the trade network by showing extensive country-level credit/equity cross-sectional return predictability. News about country fundamentals flows primarily from importers to exporters, depends on both direct and indirect links in the trade network, and is magnified by the exporting country's financial vulnerability.

DOI
10.1016/j.jfineco.2021.08.005
Volume
145
Issue
1
Pages
217-238
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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