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arXiv · 2609.33881

Understanding Sectoral Responses to Tariff Uncertainty via a High-Dimensional Mediation Analysis

Qilan Hong·Runze Li
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Abstract

This paper conducts an empirical mediation analysis to examine how U.S. stock-market sectors responded to the 2025 tariff-policy episode. Using S&P 500 stock data along with hundreds of firm-level financial variables, we study whether sector membership was associated with differences in stock returns and whether these differences were statistically related to firm financial characteristics. For each of five economically distinct tariff-policy windows, we use high-dimensional linear causal mediation models to estimate the direct sector effects. We use a linear regression model to estimate the total sector effects, and then estimate the indrect sector effects by using the difference between the total sector effects and the direct sector effects. To accommodate a large number of candidate mediators, we use a partially penalized least-squares procedure that regularizes financial-variable coefficients while unpenalizes coefficients of all sector indicators. Wald and F-type tests are used to examine whether indirect and direct effects are significant or not, respectively. The results show that tariff news did not produce one uniform market response. Sector effects vary across five economically distinct tariff-policy windows. The clearest findings are in the direct sector effects. Technology was the sector most negatively affected during the initial decline and escalation collapse, but it also rebounded most strongly during the April 9 relief rally. The results indicate that in addition to Technology, Energy and other trade-exposed sectors were particularly affected during the initial decline and escalation phases. The selected mediators provide evidence that growth, investment, liquidity, profitability, and cash-flow characteristics helped characterize firms associated with sector-level return differences.

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Qilan Hong, Runze Li. 2026-09-27. Understanding Sectoral Responses to Tariff Uncertainty via a High-Dimensional Mediation Analysis. https://arxiv.org/abs/2609.33881

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