Raddatz, Claudio2012-03-192012-03-192011-03-01https://hdl.handle.net/10986/3357A 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.CC BY 3.0 IGOABSOLUTE VALUEADVERSE EFFECTANCHOR CURRENCYANNUAL GROWTHAVERAGE EXCHANGE RATEBARRIERBILATERAL EXCHANGE RATEBILATERAL EXCHANGE RATESBILATERAL TRADECAPITAL INTENSITYCENTRAL BANKSCOMMODITIESCOMMODITYCOMMODITY EXPORTSCOMMODITY PRICECOMMON CURRENCIESCOMPARATIVE ADVANTAGECOUNTRY FIXED EFFECTSCURRENCYCURRENCY HEDGINGCURRENCY RISKCURRENCY UNIONCURRENCY UNIONSDATA AVAILABILITYDEBTDEGREE OF RISKDEPENDENT VARIABLEDEPRECIATIONSDERIVATIVEDERIVATIVE MARKETSDERIVATIVES MARKETDERIVATIVES MARKETSDEVELOPING COUNTRIESDEVELOPMENT ECONOMICSDEVELOPMENT OF EXCHANGEDEVELOPMENT POLICYDOLLAR DEBTDOLLAR EXCHANGE RATEDOMESTIC PRICESECONOMETRICSECONOMIC GROWTHECONOMIC POLICYECONOMIC RESEARCHECONOMIC SIZEECONOMIC SURVEYSELASTICITYELASTICITY OF SUBSTITUTIONEMERGING CURRENCY BLOCSEQUATIONSEQUILIBRIUMEXCHANGE RATEEXCHANGE RATE ARRANGEMENTSEXCHANGE RATE DATAEXCHANGE RATE FLUCTUATIONSEXCHANGE RATE MOVEMENTSEXCHANGE RATE REGIMEEXCHANGE RATE REGIMESEXCHANGE RATE RISKEXCHANGE RATE RISKSEXCHANGE RATE UNCERTAINTYEXCHANGE RATE VOLATILITYEXCHANGE RATESEXPLANATORY VARIABLEEXPORT SHAREEXPORT SHARESEXPORT VOLUMESEXPORTEREXPORTERSEXPOSUREFINANCIAL DERIVATIVESFINANCIAL SECTORFINANCIAL SUPPORTFIXED EXCHANGE RATESFLEXIBLE EXCHANGE RATESFOREIGN EXCHANGEFOREIGN EXCHANGE RATEFUTURE RESEARCHFUTURESGDPGDP PER CAPITAGLOBAL EXPORTGLOBAL EXPORTSGLOBAL TRADEGRAVITY MODELSGROWTH RATEGROWTH RATESHARD PEGSHEDGESHEDGING INSTRUMENTSHISTORY OF EXCHANGE RATEHOME COUNTRYHOMOGENEOUS GOODSHUMAN CAPITALIMPORTIMPORT PRICEIMPORTSINCOMEINCOME LEVELSINSTRUMENTINSTRUMENTAL VARIABLEINSTRUMENTAL VARIABLESINTERNATIONAL BANKINTERNATIONAL COMPETITIVENESSINTERNATIONAL ECONOMICSINTERNATIONAL FINANCIAL STATISTICSINTERNATIONAL MARKETSINTERNATIONAL MONETARY FUNDINTERNATIONAL PRICEINTERNATIONAL PRICESINTERNATIONAL SETTLEMENTSINTERNATIONAL TRADELEVYLIBERALIZATIONLIQUIDITYLOCAL CURRENCYLONG RUN EQUILIBRIUMMACROECONOMIC VOLATILITYMACROECONOMICSMAJOR CURRENCIESMARKET DATAMARKET FORCESMONETARY FUNDMULTILATERAL TRADENOMINAL EXCHANGE RATENOMINAL EXCHANGE RATESOPEN COUNTRIESOUTPUTOUTPUT PER CAPITAPEGPEGSPOLITICAL ECONOMYPRICE INDEXPRICE INDEXESPRICE MOVEMENTSPRICE OF GOODPRICE OF GOODSPRICE SERIESPRICE VOLATILITYPRIVATE CREDITREAL COSTSREAL EXCHANGE RATEREAL EXCHANGE RATESREFERENCE CURRENCYRELATIVE PRICERELATIVE PRICESRISK AVERSESTANDARD DEVIATIONSTANDARD DEVIATIONSSTEADY STATESTRUCTURAL REFORMSSWAPSTEST OF EQUALITYTOTAL EXPORTTOTAL EXPORTSTRADE DATATRADE IMPACTTRADE LIBERALIZATIONTRADE OPENNESSTRADE PATTERNTRADE PATTERNSTRADE SHARETRADE SHARESTRADINGTRADING PARTNERTRADING PARTNERSTRANSPORTATION COSTTRUST FUNDTURNOVERUNCERTAINTYUNDERDEVELOPED COUNTRIESVALUE INDEXESVOLATILE ENVIRONMENTSVOLATILE EXCHANGE RATESVOLATILITIESVOLATILITYVOLUME OF TRADEWEIGHTSWORLD DEVELOPMENT INDICATORSWORLD PRICEWORLD TRADEWorld Bank10.1596/1813-9450-5590