Consumption and Hedging in Oilâ€ Importing Developing Countries
Felipe Aldunate and
Jaime Casassus ()
European Financial Management, 2012, vol. 18, issue 5, 896-928
We study the consumption and hedging strategy of an oilâ€ importing developing country that faces multiple crude oil shocks. In our model, developing countries have two particular characteristics: their economies are mainly driven by natural resources and their technologies are less efficient in energy usage. The natural resource exports can be correlated with the crude oil shocks. The country can hedge against the crude oil uncertainty by taking long/short positions in existing crude oil futures contracts. We find that both inefficiencies in energy usage and shocks to the crude oil price lower the productivity of capital. This generates a negative income effect and a positive substitution effect, because todayâ€™s consumption is relatively cheaper than tomorrowâ€™s consumption. Optimal consumption of the country depends on the magnitudes of these effects and on its riskâ€ aversion degree. Shocks to other crude oil factors, such as the convenience yield, are also studied. We find that the persistence of the shocks magnifies the income and substitution effects on consumption, thus also affecting the hedging strategy of the country. The demand for futures contracts is decomposed in a myopic demand, a pure hedging term and productive hedging demands. These hedging demands arise to hedge against changes in the productivity of capital due to changes in crude oil spot prices. We calibrate the model for Chile and study to what extent the countryâ€™s copper exports can be used to hedge the crude oil risk.
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