Forward freight agreements & market transparency in the capesize sector
Master Thesis
Author
Παναγιωτόπουλος, Γεώργιος
Panagiotopoulos, George
Date
2016Advisor
Πολέμης, ΔιονύσιοςView/ Open
Keywords
Forward Freight Agreements ; Capesize ; Volatility ; GJR-GARCH ; Freight ; Shipping markets ; CommoditiesAbstract
The current thesis intends to clarify the connection between the trade of Forward Freight Agreements and its ripple effects in the volatility of the spot freights in the physical market of Capesize vessels.
The analysis uses as a tool the GJR-GARCH econometric process to model the volatility of the spot freight rates in the routes C3, C5, C7 and the time charter average index 4TC. A connection with the trading of FFAs is established through the use of dummy variables, while additional factors that affect the whole economy, WTI, Brent and S&P500 Commodity Index, are incorporated into the model with the intention to take into account other variables that may affect volatility in shipping markets.
The results may be divided into two processes. In the first process we isolate the effect of the FFAs in the volatility of the spot rates in the physical market of this specific sector. The empirical results for the 4TC and the routes C3 and C5 indicate that FFA led to a rise in the volatility in a small degree however. For the C7 Capesize route, the models produced where insufficient thus the results were of no use.
In the second process, the goal was to identify the effect of FFA in the asymmetric response of negative shocks or information to the volatility of the physical market. By dividing the data in pre and post-FFA samples we managed to have substantial results only for the 4TC, as for the voyage routes a comparison was not possible because of insufficient models produced. In the 4TC however, the introduction of the “paper” market had as a result the elimination of the effect of negative past information in the current volatility. That means that FFAs helped the more efficient incorporation of information in the physical market.