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

Fabio Comelli and Esther Perez Ruiz

No 2016/218, IMF Working Papers from International Monetary Fund

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 1½ 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: WP; strike price; copper price; exchange rate; uncertainty; investment; option contracts; vector autoregression; Chile; copper price uncertainty; price movement; copper price volatility; foreign exchange option market; log copper price; investment decision; copper price forecast; USD exchange rate; terms of the probability; copper price option; reference price; volatile copper price; Metal prices; Asset prices; Exchange rates; Options; Copper; Global (search for similar items in EconPapers)
Pages: 23
Date: 2016-11-15
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Citations: View citations in EconPapers (3)

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