Forecasting spot freight rates based on forward freight agreement and time charter contract

Abstract

In this article, the lead-lag relationship in freight rates between spot and forward markets and between spot and time charter (TC) markets was investigated. A hybrid forecasting method for spot freight rates was proposed based on the price discovery functions of the freight forward agreement (FFA) and the TC contract. VECM-based models were developed to analyse the relation between spot rates and FFA and TC rates. Empirical results indicate that cointegration does exist between spot and FFA rates and between spot and TC rates. Furthermore, while both FFA and TC rates are helpful in forecasting spot freight rates, the integration of the two can further improve the forecasting performance of spot freight rates.

Economic information transmissions and liquidity between shipping markets: New evidence from freight derivatives

“…More specifically our investigation focuses on three major categories of dry-bulk vessels; namely Capesize (around 160,000 deadweightdwt), Panamax (around 75,000 dwt) and Supramax (around 54,000 dwt) vessels. Although freight forward/futures prices have been found to informationally lead the underlying freight rates (Kavussanos and Visvikis, 2004;Spreckelsen et al, 2014;Zhang et al, 2014) and lag the commodity futures prices (Kavussanos et al, 2014), there exists no evidence on the interaction with freight options. 2 Employing a research design that utilizes both futures and options derivatives allows us to highlight differences in price discovery between these two inter-related but yet distinct markets.…”

A survey of shipping finance research: Setting the future research agenda

“…The ANN model trained and estimated can provide guidance to investors regarding which position (long or short) to take in the derivatives market. In the same vein, Zhang et al (2014) propose a forecasting approach for spot freight rates based on the price discovery function of freight derivatives. The authors suggest that both spot and timecharter freight rates can improve forecasts of the spot freight rates.…”

Modeling the determinants of dry bulk FFA trading volume from a cross-market perspective of spot and forward

“…FFA price volatility and FFA trading volume (Alizadeh, 2013). Others discuss the relationship between prices in the spot and forward markets (Kavussanos and Visvikis, 2004;Kavussanos et al, 2004aKavussanos et al, , 2004bBatchelor et al, 2007;Tezuka et al, 2012;Zhang et al, 2014), or the volatility spillovers (Kavussanos et al, 2014;Tsouknidis, 2016), from a crossmarket perspective. In our paper, we propose a theoretical model to characterize the optimal FFA procurement strategies to indicate the FFA hedging function.…”

“…Moreover, they obtain an optimal hedge ratio based on their model. Zhang et al (2014) explore the lead-lag relationships in freight rates between spot and forward markets. Li et al (2014) use dynamic conditional correlation (DCC)-GARCH model to investigate the spillover effects and dynamic correlations between spot and forward tanker freight rates returns.…”