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VaR as a risk management framework for the spot and futures tanker markets

Author

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  • Charalampos Basdekis

    (National & Kapodistrian University of Athens)

  • Apostolos Christopoulos

    (University of the Aegean)

  • Alexandros Gkolfinopoulos

    (National Technical University of Athens)

  • Ioannis Katsampoxakis

    (National & Kapodistrian University of Athens)

Abstract

The fluctuation of the freight rates is an important source of risk for all participants in the tanker shipping markets including ship-owners, charterers, traders, hedge funds, banks, etc. This study examines the freight rate risk involved in the most popular clean tanker route and the most popular dirty tanker route using historical prices from April 2008 to September 2015 for the routes TC5 and TD7 which are further divided into an in-sample period from 24 April 2008 to 7 November 2013, to estimate the coefficients and an out-of-sample period from 8 November 2013 to 2 September 2015, to measure the day to day Value at Risk performance. The analysis of the historical returns of both spot and future prices reveals historical distributions with high peaks and fat tails. The establishment of a risk management method that could capture these distribution characteristics is of paramount importance. For the quantification of the risk, the Value at Risk approach is applied. More specifically, a range of parametric (multiple GARCH family) and non-parametric (i.e. historical simulation) Value at Risk models are applied on the returns of both TC5 and TC7 spot and one and three months future markets. The results suggest substantial freight rate risk at both routes. The backtesting of the Value at Risk models is applied in two stages, firstly by the means of statistical accuracy of the results and secondly by the means of economic accuracy, in order to track down the best VAR models in the case of our research. According to the results, the simple GARCH and non-parametric models are proposed for risk management purposes, for both spot and future markets. The results are consistent for both long and short positions. According to the results, simple GARCH non-parametric models perform better in risk management, for both spot and futures markets. The results are consistent for both long and short positions.

Suggested Citation

  • Charalampos Basdekis & Apostolos Christopoulos & Alexandros Gkolfinopoulos & Ioannis Katsampoxakis, 2022. "VaR as a risk management framework for the spot and futures tanker markets," Operational Research, Springer, vol. 22(4), pages 4287-4352, September.
    • Handle: RePEc:spr:operea:v:22:y:2022:i:4:d:10.1007_s12351-021-00673-y
    DOI: 10.1007/s12351-021-00673-y
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