Extreme Price Co-movement of Commodity Futures and Industrial Production Growth: An Empirical Evaluation
By Xiaoqian Wen, Ph.D., Southwestern University of Finance and Economics, China; Yuxin Xie, Ph.D., Southwestern University of Finance and Economics, China; and Athanasios A. Pantelous, Ph.D., Monash University, Australia; and Edited by Ana-Maria Fuertes, Ph.D., Bayes Business School, City, University of London (U.K.) and Associate Editor of the GCARD
This article studies whether the extreme price co-movement of commodity futures can be exploited to anticipate future industrial production (IP) growth. For this purpose, an empirical model is estimated to derive a measure that characterizes upside and downside price extremes. The derived price extremes are shown to be positively associated with IP growth over the next quarter. The findings further suggest the presence of an asymmetry: the association corresponding to downside extremes is robust whereas that of upside extremes is weaker. The findings reinforce the informational friction theory as well as those financial studies that emphasize downside risk in financial markets.
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