IDEAS home Printed from https://ideas.repec.org/a/pal/marecl/v19y2017i4d10.1057_mel.2016.7.html
   My bibliography  Save this article

Are recent tanker freight rates stationary?

Author

Listed:
  • Javier Población

    (D.G. Supervisión, Banco de España)

Abstract

The evidence concerning the stationary nature of freight rates is quite ambiguous: some studies conclude that freight rates are stationary, and others conclude the opposite. However, none uses spot and futures freight rates jointly to determine whether freight rates are stationary. Studying the stationary nature jointly in spot and futures freight rates is important because, theoretically, futures freight rates are the risk-neutral expectation of spot freight rates, and if this close relationship is not maintained in practice, arbitrage opportunities could arise. In this article, we investigate the main empirical properties of several freight rate time series, and when we calibrate stochastic models using joint spot and futures freight rates, we find that there are serious doubts about the stationary nature of freight rates. Moreover, a non-stationary factor-model for freight rates is proposed and estimated, and we show that it achieves better results than the stationary model. This means that if freight rates are non-stationary and a stationary model is applied to characterize their dynamics, model fit will be poor and, consequently, valuations based on a stationary model will not be sufficiently accurate. Similar arguments apply in the case of hedging: whenever the construction of a hedging portfolio is attempted, based on non-stationary assumptions, applied to stationary freight rate series, the hedging strategy will not be effective because the residual (basis) risk will be very large.

Suggested Citation

  • Javier Población, 2017. "Are recent tanker freight rates stationary?," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 19(4), pages 650-666, December.
    • Handle: RePEc:pal:marecl:v:19:y:2017:i:4:d:10.1057_mel.2016.7
    DOI: 10.1057/mel.2016.7
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/mel.2016.7
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1057/mel.2016.7?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
    2. Manolis G. Kavussanos & Ilias D. Visvikis, 2011. "The Predictability of Non-Overlapping Forecasts: Evidence from a New Market," Multinational Finance Journal, Multinational Finance Journal, vol. 15(1-2), pages 125-156, March - J.
    3. Manolis G. Kavussanos & Amir H. Alizadeh-M, 2002. "The Expectations Hypothesis of the Term Structure and Risk Premiums in Dry Bulk Shipping Freight Markets," Journal of Transport Economics and Policy, University of Bath, vol. 36(2), pages 267-304, May.
    4. Carsten Sørensen, 2002. "Modeling seasonality in agricultural commodity futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 22(5), pages 393-426, May.
    5. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    6. Steen Koekebakker & Roar Adland & Sigbjørn Sødal, 2006. "Are Spot Freight Rates Stationary?," Journal of Transport Economics and Policy, University of Bath, vol. 40(3), pages 449-472, September.
    7. Yao-Jen Hsiao & Heng-Chih Chou & Chun-Chou Wu, 2014. "Return lead-lag and volatility transmission in shipping freight markets," Maritime Policy & Management, Taylor & Francis Journals, vol. 41(7), pages 697-714, December.
    8. Steen Koekebakker * & Roar Os Ådland, 2004. "Modelling forward freight rate dynamics—empirical evidence from time charter rates," Maritime Policy & Management, Taylor & Francis Journals, vol. 31(4), pages 319-335, October.
    9. Ying Kou & Meifeng Luo, 2015. "Modelling the Relationship between Ship Price and Freight Rate with Structural Changes," Journal of Transport Economics and Policy, University of Bath, vol. 49(2), pages 276-294, April.
    10. Dempster, M.A.H. & Medova, Elena & Tang, Ke, 2008. "Long term spread option valuation and hedging," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2530-2540, December.
    11. Javier Poblacion, 2015. "The stochastic seasonal behavior of freight rate dynamics," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 17(2), pages 142-162, June.
    12. Jostein Tvedt, 2003. "A new perspective on price dynamics of the dry bulk market," Maritime Policy & Management, Taylor & Francis Journals, vol. 30(3), pages 221-230, July.
    13. D.R. Glen & P. Rogers, 1997. "Does Weight matter? A Statistical analysis of the SSY Capesize index," Maritime Policy & Management, Taylor & Francis Journals, vol. 24(4), pages 351-364, January.
    14. Adland, Roar & Cullinane, Kevin, 2006. "The non-linear dynamics of spot freight rates in tanker markets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 42(3), pages 211-224, May.
    15. Gonzalo Cortazar & Lorenzo Naranjo, 2006. "An N‐factor Gaussian model of oil futures prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 26(3), pages 243-268, March.
    16. Veenstra, Albert Willem & Franses, Philip Hans, 1997. "A co-integration approach to forecasting freight rates in the dry bulk shipping sector," Transportation Research Part A: Policy and Practice, Elsevier, vol. 31(6), pages 447-458, November.
    17. repec:mfj:journl:v:16:y:2011:i:1-2:p:125-156 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Javier Población & Gregorio Serna, 2021. "Measuring bulk shipping prices risk," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 23(2), pages 291-309, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Javier Población & Gregorio Serna, 2018. "A common long-term trend for bulk shipping prices," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 20(3), pages 421-432, September.
    2. Roar Adland & David Hansson & Levin von der Wense, 2017. "Valuing cargo flexibility in oil transportation," Maritime Policy & Management, Taylor & Francis Journals, vol. 44(7), pages 803-814, October.
    3. Kou, Ying & Luo, Meifeng, 2018. "Market driven ship investment decision using the real option approach," Transportation Research Part A: Policy and Practice, Elsevier, vol. 118(C), pages 714-729.
    4. Javier Población & Gregorio Serna, 2021. "Measuring bulk shipping prices risk," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 23(2), pages 291-309, June.
    5. Población, Javier & Serna, Gregorio, 2016. "Is the refining margin stationary?," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 169-186.
    6. Andrés García-Mirantes & Beatriz Larraz & Javier Población, 2020. "A Proposal to Fix the Number of Factors on Modeling the Dynamics of Futures Contracts on Commodity Prices," Mathematics, MDPI, vol. 8(6), pages 1-13, June.
    7. Prochazka, Vit & Adland, Roar & Wallace, Stein W., 2019. "The value of foresight in the drybulk freight market," Transportation Research Part A: Policy and Practice, Elsevier, vol. 129(C), pages 232-245.
    8. Andrés García Mirantes & Javier Población & Gregorio Serna, 2012. "The Stochastic Seasonal Behaviour of Natural Gas Prices," European Financial Management, European Financial Management Association, vol. 18(3), pages 410-443, June.
    9. Guo, Zi-Yi, 2017. "Models with Short-Term Variations and Long-Term Dynamics in Risk Management of Commodity Derivatives," EconStor Preprints 167619, ZBW - Leibniz Information Centre for Economics.
    10. Power, Gabriel J. & Eaves, James & Turvey, Calum & Vedenov, Dmitry, 2017. "Catching the curl: Wavelet thresholding improves forward curve modelling," Economic Modelling, Elsevier, vol. 64(C), pages 312-321.
    11. Cheng, Benjamin & Nikitopoulos, Christina Sklibosios & Schlögl, Erik, 2018. "Pricing of long-dated commodity derivatives: Do stochastic interest rates matter?," Journal of Banking & Finance, Elsevier, vol. 95(C), pages 148-166.
    12. Koichiro Hayashi, 2020. "Stationarity of spot freight rates considering supply/demand effect," Journal of Shipping and Trade, Springer, vol. 5(1), pages 1-9, December.
    13. Koekebakker, Steen & Adland, Roar & Sødal, Sigbjørn, 2007. "Pricing freight rate options," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 43(5), pages 535-548, September.
    14. Guo, Zi-Yi, 2021. "Price volatilities of bitcoin futures," Finance Research Letters, Elsevier, vol. 43(C).
    15. Back, Janis & Prokopczuk, Marcel & Rudolf, Markus, 2013. "Seasonality and the valuation of commodity options," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 273-290.
    16. Roar Adland & Pierre Cariou & François-Charles Wolff, 2018. "Comparing transaction-based and expert-generated price indices in the market for offshore support vessels," Working Papers halshs-01843720, HAL.
    17. Max F. Schöne & Stefan Spinler, 2017. "A four-factor stochastic volatility model of commodity prices," Review of Derivatives Research, Springer, vol. 20(2), pages 135-165, July.
    18. Shao, Chengwu & Bhar, Ramaprasad & Colwell, David B., 2015. "A multi-factor model with time-varying and seasonal risk premiums for the natural gas market," Energy Economics, Elsevier, vol. 50(C), pages 207-214.
    19. Zi-Yi Guo & Yangxiaoteng Luo, 2017. "Dynamic Stochastic Factors, Risk Management and the Energy Futures," International Business Research, Canadian Center of Science and Education, vol. 10(9), pages 50-59, September.
    20. Cartea, Álvaro & González-Pedraz, Carlos, 2012. "How much should we pay for interconnecting electricity markets? A real options approach," Energy Economics, Elsevier, vol. 34(1), pages 14-30.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:marecl:v:19:y:2017:i:4:d:10.1057_mel.2016.7. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave-journals.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.