Forecasting fuel prices with the Chilean exchange rate: Going beyond the commodity currency hypothesis

Pablo Pincheira-Brown, Andrea Bentancor, Nicolás Hardy, Nabil Jarsun

Research output: Contribution to journalArticlepeer-review

9 Scopus citations

Abstract

In this paper we show that the Chilean exchange rate has the ability to predict the returns of oil and of three additional oil-related products: gasoline, propane and heating oil. We show this using both in- and out-of sample exercises at multiple horizons. Natural explanations for our findings rely on the well know “dollar effect” and on the present-value theory for exchange rate determination in combination with the strong co-movement displayed by fuel and metal prices. Given that the Chilean economy is heavily influenced by copper, which represents nearly 50% of total national exports, the floating Chilean Peso is importantly affected by price fluctuations in this metal. As oil-related products display an important co-movement with base metal prices, it is reasonable to expect evidence of Granger causality from the Chilean peso to these oil-related products. Interestingly, we provide sound evidence indicating that the predictive ability of the Chilean Peso goes beyond these natural explanations. In particular, we show another plausible predictive channel: volatility in combination with a negative contemporaneous leverage effect in fuel returns. Finally, we compare the Chilean peso with other commodity-currencies in their ability to predict fuel returns. The Chilean peso fares extremely well in this competition, especially at short horizons of one, three and six months.

Original languageEnglish
Article number105802
JournalEnergy Economics
Volume106
DOIs
StatePublished - Feb 2022
Externally publishedYes

Keywords

  • Commodity prices
  • Energy
  • Exchange rates
  • Gasoline
  • Oil
  • Predictability
  • Time-series

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