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

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.
Publication date: November 2016
ISBN: 9781475553598
$18.00
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Topics covered in this book

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Economics- Macroeconomics , Economics / General , International - Economics , copper price , exchange rate , uncertainty , investment , option contracts , vector autoregression , Chile

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