An econometric analysis of the forward freight market

The success or failure of a derivatives (futures or forward) contract is determined by its ability to perform its economic functions efficiently, and therefore, to provide benefits to economic agents, over and above the benefits they derive from the spot market. These economic functions are price discovery and risk management through hedging. A considerable amount of empirical research has been directed towards examining these functions in different financial and commodity derivatives markets. The evidence however, on the over-the-counter FFA market is very limited. This thesis therefore, by investigating these issues provides new evidence in the literature for a forward market with some unique characteristics such as the trading of a service. Our empirical results can be summarised as follows. First, the FFA contracts perform their price discovery function efficiently since forward prices contribute to the discovery of new information regarding both current and expected spot prices. Furthermore, most FFA contracts contribute in the volatility of the relevant spot rate, and therefore, further support the notion of price discovery. Second, the introduction of FFA contracts has not had a detrimental effect on the volatility of the underlying spot market. On the contrary, it appears that there has been an improvement in the way that news is transmitted into prices following the onset of FFA trading. Third, FFA prices fail to reduce market risk to the extent evidenced in other markets in the literature and, hence, the FFA market does not perform its risk management function satisfactorily; this is thought to be the result of the lack of the cost-of-carry arbitrage relationship of storable assets that keeps spot and derivatives prices close together. Fourth, there seems to be a positive relationship between bid-ask spreads and expected price volatility in most FFA trading routes. Finally, in the routes where the cointegrating vector is restricted to be the lagged basis, the VECM generates more accurate forecasts than the VAR model and in the routes where the cointegrating vector is not restricted to be the lagged basis the VAR generates more accurate forecasts than the VECM model

Shipping equity risk behavior and portfolio management

This paper investigates the dynamics of stock price volatility for different vessel-type segments of the U. S, water transportation industry . We measure market exposure by a portfolio of tanker, dry bulk, container, and gas stocks to examine tail behavior and tail risk dependence. The role of mixture distributions in predicting future volatility is studied from both statistical and economic perspectives. We further test for predictability in co-movements in the tails of sectors returns . Findings indicate that large losses are strongly correlated, supporting asymmetric transmission processes for financial contagion. Finally, using a non-parametric approach, we extend the model to the multivariate case and assess the value of volatility and correlation timing in optimal portfolio selection. The results can help to improve the understanding of time-varying volatility, correlation and tail systemic risk of shipping stock markets, and consequently, have implications for risk management and asset allocation practices, as well as regulatory policies

The lead-lag relationship between cash and stock index futures in a new market

This paper investigates the lead-lag relationship in daily returns and volatilities between price movements of the FTSE/ATHEX-20 and FTSE/ATHEX Mid-40 stock index futures and the underlying cash indices in the relatively new futures market of Greece. Empirical results show that there is a bi-directional relationship between cash and futures prices. However, futures lead the cash index returns, by responding more rapidly to economic events than stock prices. This speed is much higher in the more liquid FTSE/ATHEX-20 market. Moreover, results indicate that futures volatilities spill information over to the corresponding cash market volatilities in both investigated futures markets, but volatilities in the cash markets have no effect on the volatilities of futures markets. Overall, it seems that new market information is disseminated faster in the futures market compared to the stock market. This implies that the futures markets can be used as price discovery vehicles, providing further evidence that derivatives markets contribute to completing and stabilising capital markets in Greece. A further finding of this study is that futures volume and disequilibrium effects between cash and futures prices are important variables in the explanation of volatilities in cash and futures markets. © 2008 Blackwell Publishing Ltd

A Novel Risk Management Framework for Natural Gas Markets

This paper examines dynamic hedges in the natural gas futures markets for different horizons and explores the gains from devising risk management strategies. Despite the substantial progress made in developing hedging models, forecast combinations have not been tested. We fill this gap by proposing a framework for combining hedge-ratio predictions. Composite hedge-ratios lead to significant reduction in portfolio risk, whether spot prices are partially predictable or not. We offer insights on hedging effectiveness across seasons, backwardationcontango conditions and the asymmetric profiles of long-short hedgers. We conclude that forecast combinations better reconcile realized performance with the hedging process, mitigating model instability