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

Abstract

Purpose-This study aims to propose a theoretical model to characterize the optimal forward freight agreement (FFA) procurement strategies and investigate the determinants of FFA trading activities from a new cross-market perspective. Findings-A two-step model specification is used to empirically test the theoretical results for the Capesize, Panamax and Supramax sectors. It is found that spot demand has a positive relation with FFA trading volume for all three sectors. Moreover, spot demand volatility has a negative relation, while the correlation between spot demand and spot rate has a positive relation with FFA trading volume for the Capesize and Panamax sectors. Originality/value-The results show that the expected spot demand is scaled by a "quantity premium," which is the product of a demand covariance term, a demand riskiness term and a demand volatility term. This can be used by the traders in the FFA market to construct their hedging strategies.

Maximum utility portfolio construction in the forward freight agreement markets: Evidence from a multivariate skewed t copula

“…Besides the price discovery and hedging functions that deal with the relationship between spot freight rates and FFA prices, efforts have also been devoted to examining other issues within and across FFA markets. For instance, Zheng and Chen (2018), Adland et al (2018), and Moutzouris and Nomikos (2019) investigate the formation and determination of FFA prices using the DCC‐GARCH model, considering a discrete‐time model, and under a partial equilibrium framework, respectively. Alizadeh (2013) investigates the relationship between trading volume and price volatility by employing the vector autoregressive‐exponential GARCH‐X (VAR‐EGARCH‐X) model.…”