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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.

Suggested Citation

  • Felipe Aldunate & Jaime Casassus, 2010. "Consumption and Hedging in Oil Importing Developing Countries," Documentos de Trabajo 376, Instituto de Economia. Pontificia Universidad Católica de Chile..
  • Handle: RePEc:ioe:doctra:376
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    File URL: http://www.economia.uc.cl/docs/dt_376.pdf
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    References listed on IDEAS

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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.
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    7. 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.
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    More about this item

    Keywords

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

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General

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