To Bet or Not to Bet: Copper Price Uncertainty and Investment in Chile
24 Pages Posted: 3 Jan 2017
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: Suggested Citation