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

24 Pages Posted: 3 Jan 2017

See all articles by Fabio Comelli

Fabio Comelli

European Central Bank (ECB)

Esther Pérez Ruiz

International Monetary Fund (IMF)

Date Written: November 2016

Abstract

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 11/2 and 2 years for investment to return to its trend level. Empirical ranges depend on alternative definitions for investment, uncertainty, and options' maturing time.

Keywords: Commodity prices, Chile, Copper, Investment, Options, Exchange rates, Vector autoregression, copper price, exchange rate, uncertainty, investment, option contracts, vector autoregression, Chile

JEL Classification: D92, E22, D80, C23

Suggested Citation

Comelli, Fabio and Pérez Ruiz, Esther, To Bet or Not to Bet: Copper Price Uncertainty and Investment in Chile (November 2016). IMF Working Paper No. 16/218, Available at SSRN: https://ssrn.com/abstract=2892604

Fabio Comelli (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Esther Pérez Ruiz

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
48
Abstract Views
700
PlumX Metrics