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

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  • Steen Koekebakker *
  • Roar Os Ådland

Abstract

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.

Suggested Citation

  • 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.
    • Handle: RePEc:taf:marpmg:v:31:y:2004:i:4:p:319-335
    DOI: 10.1080/03088830410001674197
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    1. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    2. Manolis G. Kavussanos & Nikos K. Nomikos, 2000. "Futures hedging when the structure of the underlying asset changes: The case of the BIFFEX contract," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 20(8), pages 775-801, September.
    3. John Dinwoodie & Jeffrey Morris, 2003. "Tanker forward freight agreements: the future for freight futures?," Maritime Policy & Management, Taylor & Francis Journals, vol. 30(1), pages 45-58, January.
    4. Kavussanos, Manolis G. & Nomikos, Nikos K., 2000. "Constant vs. time-varying hedge ratios and hedging efficiency in the BIFFEX market," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 36(4), pages 229-248, December.
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    Cited by:

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    5. Alizadeh, Amir H., 2013. "Trading volume and volatility in the shipping forward freight market," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 49(1), pages 250-265.
    6. Okan Duru & Sheng Huang & Emrah Bulut & Shigeru Yoshida, 2013. "Multi-layer quality function deployment (QFD) approach for improving the compromised quality satisfaction under the agency problem: A 3D QFD design for the asset selection problem in the shipping indu," Quality & Quantity: International Journal of Methodology, Springer, vol. 47(4), pages 2259-2280, June.
    7. 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.
    8. Adland, Roar & Alizadeh, Amir H., 2018. "Explaining price differences between physical and derivative freight contracts," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 118(C), pages 20-33.
    9. Adland, Roar & Alger, Harrison & Banyte, Justina & Jia, Haiying, 2017. "Does fuel efficiency pay? Empirical evidence from the drybulk timecharter market revisited," Transportation Research Part A: Policy and Practice, Elsevier, vol. 95(C), pages 1-12.
    10. 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.
    11. Amir H. Alizadeh & Roar Os Ådland & Steen Koekebakker, 2007. "Predictive power and unbiasedness of implied forward charter rates," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 26(6), pages 385-403.
    12. Okan Duru, 2017. "The Origin and Consistency of the Ton–Mile Metric in the Shipping Economics," Logistics, MDPI, vol. 1(1), pages 1-8, February.
    13. Caldana, Ruggero & Fusai, Gianluca & Roncoroni, Andrea, 2017. "Electricity forward curves with thin granularity: Theory and empirical evidence in the hourly EPEXspot market," European Journal of Operational Research, Elsevier, vol. 261(2), pages 715-734.
    14. Peter Leoni & Pieter Segaert & Sven Serneels & Tim Verdonck, 2018. "Multivariate constrained robust M‐regression for shaping forward curves in electricity markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(11), pages 1391-1406, November.
    15. Tezuka, Koichiro & Ishii, Masahiro & Ishizaka, Motokazu, 2012. "An equilibrium price model of spot and forward shipping freight markets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 48(4), pages 730-742.
    16. 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.

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