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It refers to a negative correlation between two variables like the biofuel and biodiesel output and crude oil production, commodity gold rate, and dollar.
As the temperature decreases, more heaters are purchased. It indicates the situation where the increase in market uncertainty creates a circumstance where the investors have to buy low-risk securities to balance their portfolio in the manner that the movement of each is offset by the other and the overall risk of the portfolio is balanced.
But at lower risks, the returns decline, for this reason, when the market uncertainty phase passes, the investors buy risky assets to get higher returns.
A specific pair of variables can have a coefficient between -1 and 1 where below 0 means a negative correlation. Two sets of data can be measured in a manner to arrive at a specific numerical result to estimate metrics.
Some sectors widely known for reverse relationships are oil price/airline stocks, gold/dollar, insurance payoffs, etc.
Some of the factors to consider are – Firstly, even if the two types of commodities show reverse movement in price, they may not have a direct impact on one another.
Secondly, over time in some market conditions, the two may see a positive correlation as well.
This metric is used to know how the stock and bond market move in the reverse direction but there are multiple factors and other market variables that are not included in the study to interpret the outcome, consequently, it may not provide an accurate depiction of the impact on each other.
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