Using Equity Market Reactions to Infer Exposure to Trade Liberalization

Abstract

We develop a new method for identifying firm exposure to changes in policy using asset prices that has several advantages over standard measures: it is natively firm level, it encompasses the net impact of all avenues of exposure, it yields estimates for firms in all sectors of the economy, and it captures aspects of policy change that can be difficult to quantify using standard approaches. We provide guidelines on how our method can be used in a wide range of settings and, applying it to two well-studied US trade liberalizations, find that it offers new insight into those policies’ distributional implications.