Welfare Gains from Market Insurance: The Case of Mexican Oil Price Risk

Author/Editor:

Chang Ma ; Fabian Valencia

Publication Date:

March 2, 2018

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

Over the past two decades, Mexico has hedged oil price risk through the purchase of put options. We examine the resulting welfare gains using a standard sovereign default model calibrated to Mexican data. We show that hedging increases welfare by reducing income volatility and reducing risk spreads on sovereign debt. We find welfare gains equivalent to a permanent increase in consumption of 0.44 percent with 90 percent of these gains stemming from lower risk spreads.

Series:

Working Paper No. 18/35

Subject:

English

Publication Date:

March 2, 2018

ISBN/ISSN:

9781484344163/1018-5941

Stock No:

WPIEA2018035

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

39

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