To Bet or Not to Bet: Copper Price Uncertainty and Investment in Chile

November 15, 2016

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Format: Chicago

Fabio Comelli, and . Esther Perez Ruiz To Bet or Not to Bet: Copper Price Uncertainty and Investment in Chile, (USA: International Monetary Fund, 2016) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

A strand of research documents Chile’s copper dependence hence significant exposure to terms of trade shocks. Copper prices’ sharp decline and forecast uncertainty since the end of the commodity super-cycle has rekindled the debate on Chile’s adjustment capacity to external shocks. Following Malz (2014), this paper builds a time-varying measure of copper price uncertainty using options contracts. VAR analysis shows that the investment response to an uncertainty shock of average magnitude in the sample is strong and persistent: the cumulative fall in investment from trend at a one-year horizon ranges 2–5.8 percentage points; and it takes between 1½ and 2 years for investment to return to its trend level. Empirical ranges depend on alternative definitions for investment, uncertainty, and options’ maturing time.

Subject: Asset prices, Commodities, Copper, Exchange rates, Financial institutions, Foreign exchange, Metal prices, Options, Prices

Keywords: Asset prices, Chile, Copper, Copper price, Copper price forecast, Copper price option, Copper price uncertainty, Copper price volatility, Exchange rate, Exchange rates, Foreign exchange option market, Global, Investment, Investment decision, Log copper price, Metal prices, Option contracts, Options, Price movement, Reference price, Strike price, Terms of the probability, Uncertainty, USD exchange rate, Vector autoregression, Volatile copper price, WP

Publication Details

Pages:

23
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/218
Stock No:

WPIEA2016218
ISBN:

9781475553598
ISSN:

1018-5941

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