Volatility spillover effects from US and China trade policy uncertainty to the stock market: evidence from an emerging economy

This study investigates the volatility spillover effects of US and China Trade Policy Uncertainty (TPU) on thirteen sectoral and three market-capitalisation-based indices in India using the Dynamic Conditional Correlation GARCH (DCC-GARCH) framework and monthly data ranging from April 2005 to May 2025. The findings reveal high persistence in the volatility of both TPU indices, with the DCC parameter (JDCCB1) ranges between 0.92 to 0.97. While India’s FMCG, chemicals, and energy sectors show strong and enduring co-movements with the US TPU, sectors such as auto, metal, and small-cap exhibit pronounced long-term volatility linkages with China TPU. The shock transmission component of conditional correlations remains largely insignificant, indicating that immediate co-movement between TPU and sectoral stock indices is absent. Practically, this implies that investors do not react instantly at the time of increase in uncertainty. However, we observe that correlation persistence is consistently high across sectors. This paper provides empirical evidence of sectoral heterogeneity in spillover effects, showing which parts of the Indian market are more vulnerable to US TPU vs China TPU. The findings offer policy-relevant insights for developing macroprudential tools and for portfolio risk management within the framework of rising international TPU.