U.S. Trade Policy and European Financial Markets GARCH and Vasicek Evidence on Volatility Persistence and Mean_Reversion Dynamics

Abstract

This thesis examines the evolution of EUR/USD exchange rate volatility and EU sovereign bond mean-reversion dynamics across three regimes defined by U.S. trade policy: the pre-tariff baseline (2010–2019), the crisis period (2020–2024), and the emerging new-tariff regime (2025). GARCH(1,1) estimation indicates that volatility persistence did not increase monotonically but instead underwent a structural transformation. Specifically, shock sensitivity doubled from the pre-tariff to the crisis period, while volatility memory shortened. The new-tariff regime exhibits a half-life nearly twice that of the crisis period, suggesting chronic rather than acute uncertainty. Application of the Vasicek model to five eurozone sovereign yield series reveals an unexpected core-periphery reversal: German and French yields reverted more slowly during the crisis, whereas Italian and Greek yields reverted more rapidly. This pattern is attributed to European Central Bank intervention serving as an artificial mean-reversion mechanism, rather than improvements in peripheral fundamentals. Model selection is supported by grid search, likelihood ratio tests, and the Engle-Ng sign bias test. Residual diagnostics confirm adequate model fit across all regimes, despite boundary conditions resulting from the limited new-tariff sample. These findings demonstrate that classical financial model parameters are regime-dependent, which has direct implications for risk management.