Extreme price co-movement of commodity futures and industrial production growth: An empirical evaluation

Abstract

This paper studies how the extreme price co-movement of commodity futures indicates industrial production (IP) growth. In this regard, we model synchronized movements and large price changes into one measure by characterizing upside and downside price extremes. We find that the derived price extremes are positively associated with IP growth over the next quarter. We further conclude that such impact is not symmetric, as the impact led by downside extremes is robust whereas that of upside extremes is not. Our results reinforce the informational friction theory as well as those financial studies that emphasize downside risk.