Modelling forward freight rate dynamics—empirical evidence from time charter rates

The purpose of this paper is to investigate the dynamics of forward freight rate dynamics. We specify our model in a Heath–Jarrow–Morton framework. This model was originally developed for interest rate markets and, in subsequent work, the model has been applied to various commodity markets. We analyse ten years of weekly time charter (TC) rates for a Panamax 65,000?dwt bulk carrier. Our data set consists of 6-, 12- and 36-month TC rates. We use this data to construct, each day, a forward rate function using a smoothing algorithm. We use the smooth data to investigate the factors governing the dynamics of the forward freight rate curve. We find a strange volatility structure in the data. Out results show that the volatility of the forward curve is bumped, with volatility reaching a peak for freight rates with roughly one year to maturity. Also, correlations between different parts of the term structure are in general low and even negative.     

Combination hedging strategies for crude oil and dry bulk freight rates on the impacts of dynamic cross-market interaction

The fluctuation of freight rates revenue and the fierce volatility of oil cost are two of the most key risk exposures in the shipping industry. However, neglecting the dynamic interrelationship between the cost and the revenue markets leads to the overestimation or underestimation of hedging ratios, which makes the present single hedge strategy less efficient. This paper proposes an optimal combination hedging model for a shipowner trading the derivatives of crude oil and dry bulk freight rates simultaneously with the cross-market economic linkages. We investigate the impacts of spillover transmission, structural breaks, and dynamic conditional correlations (DCCs) on the optimal combination hedging trading. It is found that the significant volatility transmission between oil future and dry bulk forward freight agreements suggests a high dependence of the Capesize sector on the oil fluctuations, which means that the dynamic cross-market interactions have significant impacts on the aggregate risk exposures. Furthermore, the DCCs incorporating structural breaks significantly improve the performance of the combination hedge, which is superior to the two separate hedging strategies. Our study offers new insights into how the freight rates and oil markets relate to a combination hedging, which can be used to promote the risk management in the market.     

Spillover effects and dynamic correlations between spot and forward tanker freight markets

Monitoring and analysing information transmission across different shipping markets is an important tool for participants to predict shipping freight rates, design portfolio investments and manage freight rate risks. The purpose of this article is to investigate spillover effects and dynamic correlations between shipping spot and derivatives markets (tanker forward freight agreement, FFA) under the multivariate generalized autoregressive conditional heteroscedasticity framework. Empirical results show that spillovers in returns are unilateral from one-month FFA to spot markets, while they are bilateral between one-month and two-month FFA markets. However, insignificant mean spillovers between spot and two-month FFA markets are found. Volatility spillover effects among one-month FFA, two-month FFA and spot freight markets are bilateral. By analysing the correlation between different markets, highly persistent and significantly volatile correlations are found. Moreover, time-varying correlations between one-month and two-month FFA markets are much higher than those of between spot and each FFA market. Results from this article will be helpful to improve participants’ predictions of return, volatility and correlation, which are significant for determining hedge strategies. In addition, the management of freight rate risk and portfolio investment can also benefit from the empirical results obtained in this article.     

Is there potential for a two-tier tanker market?

The simulations performed show that demand for quality tankers has to increase by 30% for a two-tier tanker market to emerge. The two-tier freight structure will only last for 3-5 years due to contracting induced by higher freight rates. This means that OPA does not by itself result in higher freight rates for tankers that comply with the requirements. If Western Europe also closes their trades to substandard tankers, a two-tier market emerges and quality tankers obtain a premium. The paper presents a simulation model for international tanker markets. The non-linear complementary equilibrium model solves for a sequence of static equilibria in segmented tanker freight markets, shipbuilding and scrapping markets. Freight markets are segmented according to quality requirements for tankers. The model specifies three tanker classes and one quality tankers can operate both market segments.     

Exploring the link between oil prices and tanker rates

Given the secular and sharp rise in oil prices over the past decade, this study analyses the impact that the spike in oil prices has on tanker rates. We investigate a dynamic model explaining spot tanker rates. The magnitude of the impact of oil prices on the shipping industry, in terms of the level and volatility of spot (voyage) under bull and bear market conditions. The West African–US Gulf Tanker Rates, West Texas Intermediate spot and 3-month futures contract, and US Weekly Petroleum Inventories are analysed using cointegration and Granger causality analysis, from 1997 through 2007, in order to examine the lead–lag relationship between oil prices and tanker freight rates. Our findings show a relationship between spot and future crude oil prices, crude oil inventories and tanker rates. The significant increase of freight rates, and the simultaneous increase in oil prices, during the recent years, provides an intriguing economic environment to identify relationships between shipping market rates and oil prices. These relationships have significant implications for the markets. At the practical level, the better understanding of the relationship between freight rates and crude oil prices can improve operational management and budget planning decisions.     

On the nature and sorces of controversy in the economic analysis of the liner shipping industry†

The simulations performed show that demand for quality tankers has to increase by 30% for a two-tier tanker market to emerge. The two-tier freight structure will only last for 3–5 years due to contracting induced by higher freight rates. This means that OPA does not by itself result in higher freight rates for tankers that comply with the requirements. If Western Europe also closes their trades to substandard tankers, a two-tier market emerges and quality tankers obtain a premium. The paper presents a simulation model for international tanker markets. The non-linear complementary equilibrium model solves for a sequence of static equilibria in segmented tanker freight markets, shipbuilding and scrapping markets. Freight markets are segmented according to quality requirements for tankers. The model specifies three tanker classes and one—quality tankers—can operate both market segments.     

An analysis of freight rate volatility in dry bulk shipping markets

The world bulk shipping market has been in a peak period since 2003, and this has lasted an incredibly long time considering that the markets are much more complex than before. This paper investigates the characteristics of volatility in dry bulk freight rates of different vessel sizes (capesize, panamax and handysize). The daily returns of freight rate indices of three different types of bulk vessel in the sample period have been examined. The sample period ran from 1 March 1999 to 23 December 2005, and applying the GARCH (generalized auto regressive conditional heteroskedasticity) model showed that the shocks will not decrease but have the tendency to strengthen for all the daily return series. Further, external shocks on the market have a different magnitude of influence on volatility in different types of vessels due to their distinct flexibility. To examine the asymmetric characters of daily return volatility in different bulk shipping sectors and different market conditions, the sample was divided into two periods: one is from 1 March 1999 to 31 December 2002, the other is from 1 January 2003 to 23 December 2005; the EGARCH (exponential generalized auto regressive conditional heteroskedasticity) model was then applied to investigate the asymmetric impact between past innovations and current volatility. The results show that the asymmetric characters are distinct for different vessel size segments and different market conditions. The reasons for the results are discussed and it is considered that the main reasons may be the different flexibility and different commodity transport on different routes. The results from this investigation will be useful for the operators and investors in the dry bulk shipping market to increase profitability and reduce investment risk.     

-statistic is the ratio between a normal (0,1) distributed variable and the square root of a centrally distributed chi-square variable divided by its expected value, i.e., its degree of freedom.

This paper evaluates empirically some very common theories of the freight rate generating process in the time charter markets. After a review of the most common assumptions made of the way time charter rates are set, the hypotheses are identified as follows: (a) the Zannetos Hypothesis, (b), the Lagged Zannetos Hypothesis, (c) the Koyck Lag Hypothesis, (d) the Rational Expectation Hypothesis, and (e) the Conventional Wisdom Hypothesis. These hypotheses are tested using statistical cointegration analysis that includes both an Augmented Dickey-Fuller (ADF), and a Johansen likelihood ratio test. Confronted with the data, hypotheses (a) and (b) are rejected outrightly. In the Koyck Lag case, the ADF statistic seem to confirm the hypothesis. A closer look at the numbers reveals that all of the impact on the time charter rates comes from the lagged dependent variable. Hence, the Koyck Lag Hypothesis is rejected. In the Rational Expectation case, the two tests conflicted. Based on the fact that the Rational Expectation Hypothesis includes the lagged dependent variable and that the Johansen test has been found to be a more robust test than the ADF test, the Rational Expectation Hypothesis is rejected. The fifth hypothesis is a reflection of the general bulk industry perception that the time charter rate is impacted by changes in the comparable spot rate and not much by the spot rate levels. In this case both the ADF and the Johansen test accepted the hypothesis for all markets. Thus, the paper concludes that the conventional market explanation of the time charter freight rate setting process is essentially correct-spot rate changes matter spot rate levels do not.     

Return lead–lag and volatility transmission in shipping freight markets

This study investigates the return lead–lag and volatility transmission between dry bulk shipping and container shipping freight markets over the period before, during and after the 2008 financial tsunami. Both cointegration analysis and the Granger causality test are applied to explore the lead–lag relationship between the Baltic dry index (BDI) and the China containerized freight index (CCFI). Besides, in the study we employed GARCH–BEKK model, which allows for transmission in freight volatility. On the whole, the empirical results show that the BDI reflects the economic climate earlier than the CCFI during the financial tsunami, whereas the CCFI leads the BDI after the financial tsunami. The price formation hypothesis could well explain the relationship. Moreover, volatility spillovers are found in most subperiods. The dynamics of the conditional volatilities differ, but causality links in the variance are found to be strong and bidirectional in normal periods, and unidirectional during the financial tsunami. Therefore, the occurrence of the financial tsunami could be regarded as an interference factor.     

Shipping freight derivatives: a survey of recent evidence

In an industry that is characterized by highly volatile prices, seasonality, strong business cycles, cyclicality and capital intensiveness, risk management is extremely important. Ship-owners and charterers face enormous risks, which emanate from fluctuations in freight rates, bunker prices, interest rates, foreign exchange rates and vessel values. These risks substantially affect the interplay between revenue and cost. Modern risk management techniques, involve the use of financial derivatives products, some of which have been developed exclusively for protecting (hedging) against the adverse price fluctuations of the aforementioned sources of risk in shipping. By using derivatives products, ship-owners and charterers can secure (stabilize) the level of their future income or costs and thus reduce uncertainty and unforeseen volatility of their cash-flow. To explore the importance of hedging freight rate risk in shipping operations, a survey of recent empirical evidence that has appeared in economic studies has been conducted. Developments over the past 20 years have been fast, with certain amount of research carried, which has helped to understand better the special features of these derivatives markets. They are all summarized in the current study, which can provide the stepping stone for further work in the area of shipping derivatives and risk management in shipping.     

Shipping freight derivatives: a survey of recent evidence

In an industry that is characterized by highly volatile prices, seasonality, strong business cycles, cyclicality and capital intensiveness, risk management is extremely important. Ship-owners and charterers face enormous risks, which emanate from fluctuations in freight rates, bunker prices, interest rates, foreign exchange rates and vessel values. These risks substantially affect the interplay between revenue and cost. Modern risk management techniques, involve the use of financial derivatives products, some of which have been developed exclusively for protecting (hedging) against the adverse price fluctuations of the aforementioned sources of risk in shipping. By using derivatives products, ship-owners and charterers can secure (stabilize) the level of their future income or costs and thus reduce uncertainty and unforeseen volatility of their cash-flow. To explore the importance of hedging freight rate risk in shipping operations, a survey of recent empirical evidence that has appeared in economic studies has been conducted. Developments over the past 20 years have been fast, with certain amount of research carried, which has helped to understand better the special features of these derivatives markets. They are all summarized in the current study, which can provide the stepping stone for further work in the area of shipping derivatives and risk management in shipping.     

A new perspective on price dynamics of the dry bulk market

The main result of this article is that freight rates and second hand prices in the dry bulk market seem to be stationary. By unit-root tests, an established tool for testing for random walk in economic time series, the random walk hypothesis can be rejected in most cases for the freight rate samples. This result is in contrast to the findings of a number of papers during the 1990s. However, the results confirm classical shipping market models that indicate stationarity in freight rates, which is not the case if the freight rates follow a random walk. By transforming all observations from US$ to Japanese yen detrended freight rates and prices seem to become stationary and volatility is reduced.     

A new perspective on price dynamics of the dry bulk market

The main result of this article is that freight rates and second hand prices in the dry bulk market seem to be stationary. By unit-root tests, an established tool for testing for random walk in economic time series, the random walk hypothesis can be rejected in most cases for the freight rate samples. This result is in contrast to the findings of a number of papers during the 1990s. However, the results confirm classical shipping market models that indicate stationarity in freight rates, which is not the case if the freight rates follow a random walk. By transforming all observations from US$ to Japanese yen detrended freight rates and prices seem to become stationary and volatility is reduced.     

波罗的海干散货运价指数波动性研究

为把握国际干散货市场运价指数的波动特征,规避航运经营风险,建立基于广义的自回归条件异方差(GARCH)的运价指数波动模型.选取四种船型的波罗的海干散货运价指数BCI、BPI、BHI、BSI作为研究的样本数据.利用EVIEWS软件,通过分析样本数据的基本统计特征和ARCH效应检验等,对四种船型分别建立了GARCH(1,1)模型.实例验证表明模型能很好地反映波罗的海干散货运价指数波动的敏感性和持续性规律,从而可为航运经营提供决策支持.     

Evaluation of risk attitude in the shipping freight market under uncertainty

ABSTRACT

The main purpose of this study is to examine how market participants take risks, in other words, what their risk attitude/preference is, and how their risk attitude could be related to the shipping freight and other markets. To address them, we calibrated the risk attitude of participants in shipping freight markets from 2007 to 2013, and provided an example of the application of risk attitude. For market participants, risk attitude/preference has an important role in understanding shipping freight markets and managing risks under uncertainty. However, risk attitude is not directly observable. To achieve this, we applied a framework that consists of structural model and calibration with market data. We interpreted risk attitude and confirmed that a structural break occurred around 2008 for the calibrated risk attitude parameter. The average risk attitude of market participants tended to be more risk-averse after 2010. We conducted an additional analysis to provide an example of the application of calibrated risk attitude, using structural equation modeling to calculate a latent variable that reflected other commodity markets. We compared the risk attitude parameter and the latent variable, and clarified the relationship between the risk attitude parameter and commodity markets.     

Market efficiency in the bulk freight market revisited

Given that the freight rate is the price of a transportation service that cannot be traded or stored; the traditional form of the efficient market hypothesis (EMH) does not apply to the freight rate price process. However, the notion of market efficiency still applies in the freight market. In particular, under the hypothesis that the market is semi-strong-form efficient, it should not be possible to make excess profit by taking chartering positions in the freight market based on public information such as past levels of the spot freight rate or the shape of the term structure of freight rates. This paper contributes to the literature by proposing an alternative test of market efficiency in the bulk freight market. We utilize technical analysis based on the history of spot freight rates and investigate the profitability of such chartering strategies for a tanker operator. The chartering decisions are based on identification of the peaks and troughs in the freight market cycles using kernel smoothing of the spot freight rate history. The empirical results suggest that a large tanker operator (e.g. a pool) could have achieved significant profits without investing in ships by trading on such information, although this does not hold in the most recent subset of the sample.     

An investigation of forecast horizon and observation fit’s influence on an econometric rate forecast model in the liner shipping industry

This paper evaluates the influence of forecast horizon and observation fit on the robustness and performance of a specific freight rate forecast model used in the liner shipping industry. In the first stage of the research, a forecast model used to predict container freight rate development is presented by exploring the relationship between individual company’s rates and aggregated market rates, and thus assists in dealing with uncertainty and market volatility for a given business situation. In the second stage, a design of experiment approach is applied to highlight the influence of the forecast horizon and observation fit and their interactions on the forecast model’s performance. The results underline the complicated nature of creating a suitable forecast model by balancing business needs, a desire to fit a good model and achieve high accuracy. There is strong empirical evidence from this study; that a robust model is preferable, that overfitting is a true danger, and that a balance must be achieved between forecast horizon and the number of observations used to fit the model. In addition, methodological guidance has also been provided on how to test, design, and choose the superior model for business needs.     

Container liner freight index based on data from e-booking platforms

This article proposes a framework for a daily container freight index (DCFI) and investigates a number of principles in the design of this type of indices. Based on a comparative analysis with the existing container freight indices, we explore a method of integrating the framework with the use of data from e-booking platforms and illustrate why the new index can provide more insightful information for shippers. We also apply the framework to have a daily Shanghai container freight index by combining data sources from the platforms linked to the Shanghai port. By implementing the index to a risk analysis problem, we use numerical results to show the DCFI’s potential position in real hedging problems for container liner markets.