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Stochastic modeling of Supramax spot and forward freight rates

Author

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  • Fred Espen Benth

    (Department of Mathematics, University of Oslo)

  • Steen Koekebakker

    (School of Business and Law, University of Agder)

Abstract

We conducted an empirical analysis of Supramax spot rates and propose a continuous time process to model the dynamics. The model incorporates features relevant for shipping freight rates, freight rate volatility that varies over time, sudden, big freight rate movements, and short-term, mean-reverting price trends. This suggests some degree of short-term predictability of Supramax spot rates, making shipping different from traditional asset markets, like stocks and currencies, and also most commodity markets. However, this does not imply that arbitrage profits are easily picked up in this market, as, financially speaking, spot freight rates are not traded assets. We instead focus on the relationship between the spot price dynamics and the forward freight agreements (FFAs) market. We apply our model to derive theoretical FFA rates. Compared with actual FFA prices, our theoretical model is able to mimic various FFA curve shapes also seen in the market. This suggests that our model may be useful for various financial management applications in shipping.

Suggested Citation

  • Fred Espen Benth & Steen Koekebakker, 2016. "Stochastic modeling of Supramax spot and forward freight rates," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 18(4), pages 391-413, December.
    • Handle: RePEc:pal:marecl:v:18:y:2016:i:4:d:10.1057_mel.2015.22
    DOI: 10.1057/mel.2015.22
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    References listed on IDEAS

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    Cited by:

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    2. Prochazka, Vít & Adland, Roar & Wolff, François-Charles, 2019. "Contracting decisions in the crude oil transportation market: Evidence from fixtures matched with AIS data," Transportation Research Part A: Policy and Practice, Elsevier, vol. 130(C), pages 37-53.
    3. Adland, Roar & Prochazka, Vit, 2021. "The value of timecharter optionality in the drybulk market," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 145(C).
    4. Yuting Gong & Xueqin Wang & Mo Zhu & Ying‐En Ge & Wenming Shi, 2023. "Maximum utility portfolio construction in the forward freight agreement markets: Evidence from a multivariate skewed t copula," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(1), pages 69-89, January.
    5. Ko, Byoung-Wook, 2018. "Dynamic patterns of dry bulk freight spot rates through the lens of a time-varying coefficient model," Transportation Research Part A: Policy and Practice, Elsevier, vol. 118(C), pages 319-330.
    6. Adland, Roar & Alizadeh, Amir H., 2018. "Explaining price differences between physical and derivative freight contracts," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 118(C), pages 20-33.

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