US dollar exchange rate and food price dependence: Implications for portfolio risk management

Juan Reboredo and Mikel Ugando

The North American Journal of Economics and Finance, 2014, vol. 30, issue C, 72-89

Abstract: This paper uses copulas to study the relationship between the US dollar (USD) exchange rate and prices for food (corn, soybeans, wheat and rice). A number of different copula specifications with different conditional dependence structures and time-varying dependence parameters were employed in the research. Empirical results for weekly data for the period January 1998–October 2012 provided evidence of positive and weak food-USD dependence and no extreme market dependence for corn, wheat and rice, thus confirming that price spikes for these foods were not caused by extreme USD depreciation. For soybeans, however, we found evidence of positive average dependence and asymmetric tail dependence, with positive upper tail dependence confirming the contribution of USD depreciation to soybean price spikes. Given that food commodities are undergoing a financialization process, we also examined the implications of USD links with food prices for food risk policy management. We provide evidence of USD hedging effectiveness in reducing food portfolio risk and downside food risk and also of better overall performance in terms of the investor's loss function than a food-only portfolio.

Keywords: Food prices; US dollar exchange rate; Co-movement; Risk (search for similar items in EconPapers)
JEL-codes: C50 Q11 Q14 Q18 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:30:y:2014:i:c:p:72-89

DOI: 10.1016/j.najef.2014.08.005

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