Who benefits from regional trade agreements? The view from the stock market

- Novel approach to examine the effects of Regional Trade Agreements (RTAs).
- Original hand-collected data on important RTA news.
- We measure the effects of such news on the returns of national stock markets.
- Stock markets rise more for natural trading partners and poorer countries.
- We find no evidence for expected trade diversion effects.

The consequences of regional trade agreements (RTAs) on countries׳ welfare are disputed. In this paper, we assess these effects using stock returns from a recent data set that spans over 200 RTA announcements, 80 economies, and 20 years. We measure the effects of news concerning RTAs on the returns of national stock markets, after adjusting these returns for international stock market movements. We then link these abnormal returns to features of the RTA members and the agreements themselves. We find strong evidence of the natural trading partner hypothesis; stock markets rise more when RTAs are signed between countries that already engage in high volumes of trade. Stock markets also rise more when poorer countries sign RTAs, and when RTAs are signed with smaller partners. We also find no evidence that capital markets expect significant trade diversion effects.