Over the Hedge : Exchange Rate Volatility, Commodity Price Correlations, and the Structure of Trade
A long empirical literature has examined the idea that, in the absence of hedging mechanisms, currency risk should have an adverse effect on the export volumes of risk averse exporters. But there are no clear conclusions from this literature, and t...
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| Format: | Policy Research Working Paper |
| Language: | English |
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2012
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| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110315085110 http://hdl.handle.net/10986/3357 |
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okr-10986-3357 |
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| recordtype |
oai_dc |
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Digital Repository |
| institution_category |
Foreign Institution |
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Digital Repositories |
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World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English |
| topic |
ABSOLUTE VALUE ADVERSE EFFECT ANCHOR CURRENCY ANNUAL GROWTH AVERAGE EXCHANGE RATE BARRIER BILATERAL EXCHANGE RATE BILATERAL EXCHANGE RATES BILATERAL TRADE CAPITAL INTENSITY CENTRAL BANKS COMMODITIES COMMODITY COMMODITY EXPORTS COMMODITY PRICE COMMON CURRENCIES COMPARATIVE ADVANTAGE COUNTRY FIXED EFFECTS CURRENCY CURRENCY HEDGING CURRENCY RISK CURRENCY UNION CURRENCY UNIONS DATA AVAILABILITY DEBT DEGREE OF RISK DEPENDENT VARIABLE DEPRECIATIONS DERIVATIVE DERIVATIVE MARKETS DERIVATIVES MARKET DERIVATIVES MARKETS DEVELOPING COUNTRIES DEVELOPMENT ECONOMICS DEVELOPMENT OF EXCHANGE DEVELOPMENT POLICY DOLLAR DEBT DOLLAR EXCHANGE RATE DOMESTIC PRICES ECONOMETRICS ECONOMIC GROWTH ECONOMIC POLICY ECONOMIC RESEARCH ECONOMIC SIZE ECONOMIC SURVEYS ELASTICITY ELASTICITY OF SUBSTITUTION EMERGING CURRENCY BLOCS EQUATIONS EQUILIBRIUM EXCHANGE RATE EXCHANGE RATE ARRANGEMENTS EXCHANGE RATE DATA EXCHANGE RATE FLUCTUATIONS EXCHANGE RATE MOVEMENTS EXCHANGE RATE REGIME EXCHANGE RATE REGIMES EXCHANGE RATE RISK EXCHANGE RATE RISKS EXCHANGE RATE UNCERTAINTY EXCHANGE RATE VOLATILITY EXCHANGE RATES EXPLANATORY VARIABLE EXPORT SHARE EXPORT SHARES EXPORT VOLUMES EXPORTER EXPORTERS EXPOSURE FINANCIAL DERIVATIVES FINANCIAL SECTOR FINANCIAL SUPPORT FIXED EXCHANGE RATES FLEXIBLE EXCHANGE RATES FOREIGN EXCHANGE FOREIGN EXCHANGE RATE FUTURE RESEARCH FUTURES GDP GDP PER CAPITA GLOBAL EXPORT GLOBAL EXPORTS GLOBAL TRADE GRAVITY MODELS GROWTH RATE GROWTH RATES HARD PEGS HEDGES HEDGING INSTRUMENTS HISTORY OF EXCHANGE RATE HOME COUNTRY HOMOGENEOUS GOODS HUMAN CAPITAL IMPORT IMPORT PRICE IMPORTS INCOME INCOME LEVELS INSTRUMENT INSTRUMENTAL VARIABLE INSTRUMENTAL VARIABLES INTERNATIONAL BANK INTERNATIONAL COMPETITIVENESS INTERNATIONAL ECONOMICS INTERNATIONAL FINANCIAL STATISTICS INTERNATIONAL MARKETS INTERNATIONAL MONETARY FUND INTERNATIONAL PRICE INTERNATIONAL PRICES INTERNATIONAL SETTLEMENTS INTERNATIONAL TRADE LEVY LIBERALIZATION LIQUIDITY LOCAL CURRENCY LONG RUN EQUILIBRIUM MACROECONOMIC VOLATILITY MACROECONOMICS MAJOR CURRENCIES MARKET DATA MARKET FORCES MONETARY FUND MULTILATERAL TRADE NOMINAL EXCHANGE RATE NOMINAL EXCHANGE RATES OPEN COUNTRIES OUTPUT OUTPUT PER CAPITA PEG PEGS POLITICAL ECONOMY PRICE INDEX PRICE INDEXES PRICE MOVEMENTS PRICE OF GOOD PRICE OF GOODS PRICE SERIES PRICE VOLATILITY PRIVATE CREDIT REAL COSTS REAL EXCHANGE RATE REAL EXCHANGE RATES REFERENCE CURRENCY RELATIVE PRICE RELATIVE PRICES RISK AVERSE STANDARD DEVIATION STANDARD DEVIATIONS STEADY STATE STRUCTURAL REFORMS SWAPS TEST OF EQUALITY TOTAL EXPORT TOTAL EXPORTS TRADE DATA TRADE IMPACT TRADE LIBERALIZATION TRADE OPENNESS TRADE PATTERN TRADE PATTERNS TRADE SHARE TRADE SHARES TRADING TRADING PARTNER TRADING PARTNERS TRANSPORTATION COST TRUST FUND TURNOVER UNCERTAINTY UNDERDEVELOPED COUNTRIES VALUE INDEXES VOLATILE ENVIRONMENTS VOLATILE EXCHANGE RATES VOLATILITIES VOLATILITY VOLUME OF TRADE WEIGHTS WORLD DEVELOPMENT INDICATORS WORLD PRICE WORLD TRADE |
| spellingShingle |
ABSOLUTE VALUE ADVERSE EFFECT ANCHOR CURRENCY ANNUAL GROWTH AVERAGE EXCHANGE RATE BARRIER BILATERAL EXCHANGE RATE BILATERAL EXCHANGE RATES BILATERAL TRADE CAPITAL INTENSITY CENTRAL BANKS COMMODITIES COMMODITY COMMODITY EXPORTS COMMODITY PRICE COMMON CURRENCIES COMPARATIVE ADVANTAGE COUNTRY FIXED EFFECTS CURRENCY CURRENCY HEDGING CURRENCY RISK CURRENCY UNION CURRENCY UNIONS DATA AVAILABILITY DEBT DEGREE OF RISK DEPENDENT VARIABLE DEPRECIATIONS DERIVATIVE DERIVATIVE MARKETS DERIVATIVES MARKET DERIVATIVES MARKETS DEVELOPING COUNTRIES DEVELOPMENT ECONOMICS DEVELOPMENT OF EXCHANGE DEVELOPMENT POLICY DOLLAR DEBT DOLLAR EXCHANGE RATE DOMESTIC PRICES ECONOMETRICS ECONOMIC GROWTH ECONOMIC POLICY ECONOMIC RESEARCH ECONOMIC SIZE ECONOMIC SURVEYS ELASTICITY ELASTICITY OF SUBSTITUTION EMERGING CURRENCY BLOCS EQUATIONS EQUILIBRIUM EXCHANGE RATE EXCHANGE RATE ARRANGEMENTS EXCHANGE RATE DATA EXCHANGE RATE FLUCTUATIONS EXCHANGE RATE MOVEMENTS EXCHANGE RATE REGIME EXCHANGE RATE REGIMES EXCHANGE RATE RISK EXCHANGE RATE RISKS EXCHANGE RATE UNCERTAINTY EXCHANGE RATE VOLATILITY EXCHANGE RATES EXPLANATORY VARIABLE EXPORT SHARE EXPORT SHARES EXPORT VOLUMES EXPORTER EXPORTERS EXPOSURE FINANCIAL DERIVATIVES FINANCIAL SECTOR FINANCIAL SUPPORT FIXED EXCHANGE RATES FLEXIBLE EXCHANGE RATES FOREIGN EXCHANGE FOREIGN EXCHANGE RATE FUTURE RESEARCH FUTURES GDP GDP PER CAPITA GLOBAL EXPORT GLOBAL EXPORTS GLOBAL TRADE GRAVITY MODELS GROWTH RATE GROWTH RATES HARD PEGS HEDGES HEDGING INSTRUMENTS HISTORY OF EXCHANGE RATE HOME COUNTRY HOMOGENEOUS GOODS HUMAN CAPITAL IMPORT IMPORT PRICE IMPORTS INCOME INCOME LEVELS INSTRUMENT INSTRUMENTAL VARIABLE INSTRUMENTAL VARIABLES INTERNATIONAL BANK INTERNATIONAL COMPETITIVENESS INTERNATIONAL ECONOMICS INTERNATIONAL FINANCIAL STATISTICS INTERNATIONAL MARKETS INTERNATIONAL MONETARY FUND INTERNATIONAL PRICE INTERNATIONAL PRICES INTERNATIONAL SETTLEMENTS INTERNATIONAL TRADE LEVY LIBERALIZATION LIQUIDITY LOCAL CURRENCY LONG RUN EQUILIBRIUM MACROECONOMIC VOLATILITY MACROECONOMICS MAJOR CURRENCIES MARKET DATA MARKET FORCES MONETARY FUND MULTILATERAL TRADE NOMINAL EXCHANGE RATE NOMINAL EXCHANGE RATES OPEN COUNTRIES OUTPUT OUTPUT PER CAPITA PEG PEGS POLITICAL ECONOMY PRICE INDEX PRICE INDEXES PRICE MOVEMENTS PRICE OF GOOD PRICE OF GOODS PRICE SERIES PRICE VOLATILITY PRIVATE CREDIT REAL COSTS REAL EXCHANGE RATE REAL EXCHANGE RATES REFERENCE CURRENCY RELATIVE PRICE RELATIVE PRICES RISK AVERSE STANDARD DEVIATION STANDARD DEVIATIONS STEADY STATE STRUCTURAL REFORMS SWAPS TEST OF EQUALITY TOTAL EXPORT TOTAL EXPORTS TRADE DATA TRADE IMPACT TRADE LIBERALIZATION TRADE OPENNESS TRADE PATTERN TRADE PATTERNS TRADE SHARE TRADE SHARES TRADING TRADING PARTNER TRADING PARTNERS TRANSPORTATION COST TRUST FUND TURNOVER UNCERTAINTY UNDERDEVELOPED COUNTRIES VALUE INDEXES VOLATILE ENVIRONMENTS VOLATILE EXCHANGE RATES VOLATILITIES VOLATILITY VOLUME OF TRADE WEIGHTS WORLD DEVELOPMENT INDICATORS WORLD PRICE WORLD TRADE Raddatz, Claudio Over the Hedge : Exchange Rate Volatility, Commodity Price Correlations, and the Structure of Trade |
| geographic_facet |
The World Region The World Region |
| relation |
Paper is funded by the Knowledge for Change
Program (KCP),Policy Research working paper ; no. WPS 5590 |
| description |
A long empirical literature has examined
the idea that, in the absence of hedging mechanisms,
currency risk should have an adverse effect on the export
volumes of risk averse exporters. But there are no clear
conclusions from this literature, and the current consensus
seems to be that there is at most a weak negative effect of
exchange rate volatility on aggregate trade flows. However,
most of this literature examines the impact of exchange rate
volatility on aggregate trade flows, implicitly assuming a
uniform impact of this volatility on exporters across
sectors. This paper explots the fact that, if exchange rate
volatility is detrimental for trade, firms exporting goods
that offer a natural hedge against exchange rate
fluctuations -- i.e. those whose international price is
negatively correlated with the nominal exchange rate of the
country where they operate -- should be relatively benefited
in environments of high exchange rate volatility, and
capture a larger share of the country's export basket.
This hypothesis is tested using detailed data on the
composition of trade of 132 countries at 4-digit SITC level.
The results show that the commodities that offer natural
hedge capture a larger share of a country's export
basket when the exchange rate is volatile, but there is only
weak evidence that the availability of financial derivatives
to hedge currency risk reduces the importance of a
sector's natural hedge. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Raddatz, Claudio |
| author_facet |
Raddatz, Claudio |
| author_sort |
Raddatz, Claudio |
| title |
Over the Hedge : Exchange Rate Volatility, Commodity Price Correlations, and the Structure of Trade |
| title_short |
Over the Hedge : Exchange Rate Volatility, Commodity Price Correlations, and the Structure of Trade |
| title_full |
Over the Hedge : Exchange Rate Volatility, Commodity Price Correlations, and the Structure of Trade |
| title_fullStr |
Over the Hedge : Exchange Rate Volatility, Commodity Price Correlations, and the Structure of Trade |
| title_full_unstemmed |
Over the Hedge : Exchange Rate Volatility, Commodity Price Correlations, and the Structure of Trade |
| title_sort |
over the hedge : exchange rate volatility, commodity price correlations, and the structure of trade |
| publishDate |
2012 |
| url |
http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110315085110 http://hdl.handle.net/10986/3357 |
| _version_ |
1764386850810626048 |
| spelling |
okr-10986-33572021-04-23T14:02:09Z Over the Hedge : Exchange Rate Volatility, Commodity Price Correlations, and the Structure of Trade Raddatz, Claudio ABSOLUTE VALUE ADVERSE EFFECT ANCHOR CURRENCY ANNUAL GROWTH AVERAGE EXCHANGE RATE BARRIER BILATERAL EXCHANGE RATE BILATERAL EXCHANGE RATES BILATERAL TRADE CAPITAL INTENSITY CENTRAL BANKS COMMODITIES COMMODITY COMMODITY EXPORTS COMMODITY PRICE COMMON CURRENCIES COMPARATIVE ADVANTAGE COUNTRY FIXED EFFECTS CURRENCY CURRENCY HEDGING CURRENCY RISK CURRENCY UNION CURRENCY UNIONS DATA AVAILABILITY DEBT DEGREE OF RISK DEPENDENT VARIABLE DEPRECIATIONS DERIVATIVE DERIVATIVE MARKETS DERIVATIVES MARKET DERIVATIVES MARKETS DEVELOPING COUNTRIES DEVELOPMENT ECONOMICS DEVELOPMENT OF EXCHANGE DEVELOPMENT POLICY DOLLAR DEBT DOLLAR EXCHANGE RATE DOMESTIC PRICES ECONOMETRICS ECONOMIC GROWTH ECONOMIC POLICY ECONOMIC RESEARCH ECONOMIC SIZE ECONOMIC SURVEYS ELASTICITY ELASTICITY OF SUBSTITUTION EMERGING CURRENCY BLOCS EQUATIONS EQUILIBRIUM EXCHANGE RATE EXCHANGE RATE ARRANGEMENTS EXCHANGE RATE DATA EXCHANGE RATE FLUCTUATIONS EXCHANGE RATE MOVEMENTS EXCHANGE RATE REGIME EXCHANGE RATE REGIMES EXCHANGE RATE RISK EXCHANGE RATE RISKS EXCHANGE RATE UNCERTAINTY EXCHANGE RATE VOLATILITY EXCHANGE RATES EXPLANATORY VARIABLE EXPORT SHARE EXPORT SHARES EXPORT VOLUMES EXPORTER EXPORTERS EXPOSURE FINANCIAL DERIVATIVES FINANCIAL SECTOR FINANCIAL SUPPORT FIXED EXCHANGE RATES FLEXIBLE EXCHANGE RATES FOREIGN EXCHANGE FOREIGN EXCHANGE RATE FUTURE RESEARCH FUTURES GDP GDP PER CAPITA GLOBAL EXPORT GLOBAL EXPORTS GLOBAL TRADE GRAVITY MODELS GROWTH RATE GROWTH RATES HARD PEGS HEDGES HEDGING INSTRUMENTS HISTORY OF EXCHANGE RATE HOME COUNTRY HOMOGENEOUS GOODS HUMAN CAPITAL IMPORT IMPORT PRICE IMPORTS INCOME INCOME LEVELS INSTRUMENT INSTRUMENTAL VARIABLE INSTRUMENTAL VARIABLES INTERNATIONAL BANK INTERNATIONAL COMPETITIVENESS INTERNATIONAL ECONOMICS INTERNATIONAL FINANCIAL STATISTICS INTERNATIONAL MARKETS INTERNATIONAL MONETARY FUND INTERNATIONAL PRICE INTERNATIONAL PRICES INTERNATIONAL SETTLEMENTS INTERNATIONAL TRADE LEVY LIBERALIZATION LIQUIDITY LOCAL CURRENCY LONG RUN EQUILIBRIUM MACROECONOMIC VOLATILITY MACROECONOMICS MAJOR CURRENCIES MARKET DATA MARKET FORCES MONETARY FUND MULTILATERAL TRADE NOMINAL EXCHANGE RATE NOMINAL EXCHANGE RATES OPEN COUNTRIES OUTPUT OUTPUT PER CAPITA PEG PEGS POLITICAL ECONOMY PRICE INDEX PRICE INDEXES PRICE MOVEMENTS PRICE OF GOOD PRICE OF GOODS PRICE SERIES PRICE VOLATILITY PRIVATE CREDIT REAL COSTS REAL EXCHANGE RATE REAL EXCHANGE RATES REFERENCE CURRENCY RELATIVE PRICE RELATIVE PRICES RISK AVERSE STANDARD DEVIATION STANDARD DEVIATIONS STEADY STATE STRUCTURAL REFORMS SWAPS TEST OF EQUALITY TOTAL EXPORT TOTAL EXPORTS TRADE DATA TRADE IMPACT TRADE LIBERALIZATION TRADE OPENNESS TRADE PATTERN TRADE PATTERNS TRADE SHARE TRADE SHARES TRADING TRADING PARTNER TRADING PARTNERS TRANSPORTATION COST TRUST FUND TURNOVER UNCERTAINTY UNDERDEVELOPED COUNTRIES VALUE INDEXES VOLATILE ENVIRONMENTS VOLATILE EXCHANGE RATES VOLATILITIES VOLATILITY VOLUME OF TRADE WEIGHTS WORLD DEVELOPMENT INDICATORS WORLD PRICE WORLD TRADE A long empirical literature has examined the idea that, in the absence of hedging mechanisms, currency risk should have an adverse effect on the export volumes of risk averse exporters. But there are no clear conclusions from this literature, and the current consensus seems to be that there is at most a weak negative effect of exchange rate volatility on aggregate trade flows. However, most of this literature examines the impact of exchange rate volatility on aggregate trade flows, implicitly assuming a uniform impact of this volatility on exporters across sectors. This paper explots the fact that, if exchange rate volatility is detrimental for trade, firms exporting goods that offer a natural hedge against exchange rate fluctuations -- i.e. those whose international price is negatively correlated with the nominal exchange rate of the country where they operate -- should be relatively benefited in environments of high exchange rate volatility, and capture a larger share of the country's export basket. This hypothesis is tested using detailed data on the composition of trade of 132 countries at 4-digit SITC level. The results show that the commodities that offer natural hedge capture a larger share of a country's export basket when the exchange rate is volatile, but there is only weak evidence that the availability of financial derivatives to hedge currency risk reduces the importance of a sector's natural hedge. 2012-03-19T18:00:57Z 2012-03-19T18:00:57Z 2011-03-01 http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110315085110 http://hdl.handle.net/10986/3357 English Paper is funded by the Knowledge for Change Program (KCP),Policy Research working paper ; no. WPS 5590 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank Publications & Research :: Policy Research Working Paper The World Region The World Region |