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Consumption and Hedging in Oil Importing Developing Countries

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  • Felipe Aldunate
  • Jaime Casassus

Abstract

We study the consumption and hedging strategy of an oil-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 e cient 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, ine ciencies in energy usage and shocks to the crude oil price, lower the productivity of capital. This generates a negative income e ect and a positive substitution e ect, because today's consumption is relatively cheaper than tomorrow's consumption. Optimal consumption of the country depends on the magnitudes of these e ects and on its risk-aversion degree. Shocks to other crude oil factors, such as the convenience yield, are also studied. We nd that the persistence of the shocks magni es the income and substitution e ects on consumption, thus a ecting also 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 up to what extent the country's copper exports can be used to hedge the crude oil risk.

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Bibliographic Info

Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 376.

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Date of creation: 2010
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Handle: RePEc:ioe:doctra:376

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Keywords: Crude oil prices; convenience yields; risk management; emerging markets; government policy; two-sector economies;

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  1. Cashin, Paul & Cespedes, Luis F. & Sahay, Ratna, 2004. "Commodity currencies and the real exchange rate," Journal of Development Economics, Elsevier, vol. 75(1), pages 239-268, October.
  2. Lioui, Abraham & Poncet, Patrice, 1996. "Optimal hedging in a dynamic futures market with a nonnegativity constraint on wealth," Journal of Economic Dynamics and Control, Elsevier, vol. 20(6-7), pages 1101-1113.
  3. Kim, In-Moo & Loungani, Prakash, 1992. "The role of energy in real business cycle models," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 173-189, April.
  4. Francesco Caselli & James Feyrer, 2006. "The Marginal Product of Capital," CEP Discussion Papers dp0735, Centre for Economic Performance, LSE.
  5. Kilian, Lutz, 2007. "The Economic Effects of Energy Price Shocks," CEPR Discussion Papers 6559, C.E.P.R. Discussion Papers.
  6. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
  7. Chao Wei, 2003. "Energy, the Stock Market, and the Putty-Clay Investment Model," American Economic Review, American Economic Association, vol. 93(1), pages 311-323, March.
  8. Anderson, Ronald W & Danthine, Jean-Pierre, 1980. " Hedging and Joint Production: Theory and Illustrations," Journal of Finance, American Finance Association, vol. 35(2), pages 487-98, May.
  9. Jaime Casassus & Pierre Collin-Dufresne, 2005. "Stochastic Convenience Yield Implied from Commodity Futures and Interest Rates," Journal of Finance, American Finance Association, vol. 60(5), pages 2283-2331, October.
  10. Feder, Gershon & Just, Richard E & Schmitz, Andrew, 1980. "Futures Markets and the Theory of the Firm under Price Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 94(2), pages 317-28, March.
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