CONSTANT VS. TIME-VARYING HEDGE RATIOS AND HEDGING EFFICIENCY IN THE BIFFEX MARKET

This paper estimates time-varying and constant hedge ratios, and investigates their performance in reducing freight rate risk in routes 1 and 1A of the Baltic Freight Index. Time-varying hedge ratios are generated by a bivariate error correction model with a GARCH error structure. An augmented GARCH (GARCH-X) model is also introduced, where the error correction term enters in the specification of the conditional covariance matrix. This specification links the concept of disequilibrium with that of uncertainty. In- and out-of-sample tests reveal that the GARCH-X specification provides greater risk reduction than a simple GARCH and a constant hedge ratio. However it fails to eliminate the riskiness of the spot position to the extent evidenced in other markets in the literature. This is thought to be the result of the heterogeneous composition of the underlying index. It seems that restructuring the composition of the Baltic Freight Index to reflect homogeneous shipping routes may increase the hedging effectiveness of the futures contract. This indicates that the imminent introduction of the Baltic Panamax Index as the underlying asset of the Baltic International Financial Futures Exchange contract is likely to have beneficial market effects.

• Availability:
  • Find a library where document is available. Order URL: http://worldcat.org/issn/13665545
• Corporate Authors:

  Elsevier

  The Boulevard, Langford Lane
  Kidlington, Oxford  United Kingdom  OX5 1GB
• Authors:
  • Kavussanos, M G
  • Nomikos, N K
• Publication Date: 2000-12

Language

• English

Media Info

• Features: Figures; References; Tables;
• Pagination: p. 229-248
• Serial:
  • Transportation Research Part E: Logistics and Transportation Review
  • Volume: 36
  • Issue Number: 4
  • Publisher: Elsevier
  • ISSN: 1366-5545
  • Serial URL: http://www.sciencedirect.com/science/journal/13665545

Subject/Index Terms

• TRT Terms: Freight transportation; Hedging (Finance); Rates; Routes and routing; Uncertainty
• Identifier Terms: Baltic International Financial Futures Exchange
• Uncontrolled Terms: Correction (Mathematics); Disequilibrium
• Geographic Terms: Baltic Countries
• Subject Areas: Freight Transportation; Highways; Planning and Forecasting; I10: Economics and Administration;

Filing Info

• Accession Number: 00798798
• Record Type: Publication
• Files: TRIS
• Created Date: Sep 27 2000 12:00AM