Rational Expectations and Market Timing: An Event Study of the China–United States Phase One Trade Deal

ABSTRACT

Rational actors constantly incorporate information into their decision‐making behavior. Since there is often a time lag between the announcement of a policy and its implementation, an important question arises: when do rational actors incorporate new information into their market behavior, at the announcement or at the implementation of a policy? We investigate this question using the easing of trade tensions between China and the United States, marked by the “Phase One” trade deal announced in December 2019 and signed in January 2020, as a considerable positive trade shock. Focusing on two key events, the announcement of substantial tariff reductions on December 13, 2019, and the signing of the trade deal in January 2020, this study examines how both the announcement and the implementation of reduced trade barriers affected agricultural companies' stock prices. We employ an event study approach using data from the MSCI ACWI Select Agriculture Producers Investable Market Index to assess market reactions. The findings are consistent with the hypothesis derived from the conceptual framework, showing that rational market actors incorporate information at the announcement stage, not only at the implementation of a policy. However, sub‐industry analyses indicate that a subset of sub‐industries drives the aggregate effect, while additional heterogeneity analysis shows that the magnitude of the effects differs across continents. These findings are relevant for policymakers, businesses, and economists seeking to understand the broader economic implications of international trade agreements in general, and trade disputes in particular.