Multivariate modeling and analysis of regional ocean freight rates

In this paper, the authors propose a new multivariate model for the dynamics of regional ocean freight rates. They show that a cointegrated system of regional spot freight rates can be decomposed into a common non-stationary market factor and stationary regional deviations. The resulting integrated CAR process is new to the literature. By interpreting the common market factor as the global arithmetic average of the regional rates, both the market factor and the regional deviations are observable which simplifies the calibration of the model. Moreover, forward contracts on the market factor can be traded in the Forward Freight Agreement (FFA) market. The authors calibrate the model to historical spot rate processes and illustrate the term structures of volatility and correlation between the regional prices and the market factor. Their model is an important contribution towards improved modelling and hedging of regional price risk when derivative market liquidity is concentrated in a single global benchmark.

Language

  • English

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Filing Info

  • Accession Number: 01670473
  • Record Type: Publication
  • Files: TRIS
  • Created Date: Apr 20 2018 3:44PM