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US dollar exchange rate and food price dependence: Implications for portfolio risk management

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  • Reboredo, Juan C.
  • Ugando, Mikel

Abstract

This paper uses copulas to study the relationship between the US dollar (USD) exchange rate and prices for food (corn, soybeans, wheat and rice). A number of different copula specifications with different conditional dependence structures and time-varying dependence parameters were employed in the research. Empirical results for weekly data for the period January 1998–October 2012 provided evidence of positive and weak food-USD dependence and no extreme market dependence for corn, wheat and rice, thus confirming that price spikes for these foods were not caused by extreme USD depreciation. For soybeans, however, we found evidence of positive average dependence and asymmetric tail dependence, with positive upper tail dependence confirming the contribution of USD depreciation to soybean price spikes. Given that food commodities are undergoing a financialization process, we also examined the implications of USD links with food prices for food risk policy management. We provide evidence of USD hedging effectiveness in reducing food portfolio risk and downside food risk and also of better overall performance in terms of the investor's loss function than a food-only portfolio.

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  • Reboredo, Juan C. & Ugando, Mikel, 2014. "US dollar exchange rate and food price dependence: Implications for portfolio risk management," The North American Journal of Economics and Finance, Elsevier, vol. 30(C), pages 72-89.
    • Handle: RePEc:eee:ecofin:v:30:y:2014:i:c:p:72-89
    DOI: 10.1016/j.najef.2014.08.005
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    7. Jammazi, Rania & Tiwari, Aviral Kr. & Ferrer, Román & Moya, Pablo, 2015. "Time-varying dependence between stock and government bond returns: International evidence with dynamic copulas," The North American Journal of Economics and Finance, Elsevier, vol. 33(C), pages 74-93.
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    More about this item

    Keywords

    Food prices; US dollar exchange rate; Co-movement; Risk;
    All these keywords.

    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy

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