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Measuring The Market Risk Of Freight Rates: A Value-At-Risk Approach

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Author Info

  • TIMOTHEOS ANGELIDIS

    ()
    (Department of Economics, University of Peloponnese, Greece)

  • GEORGE SKIADOPOULOS

    ()
    (Department of Banking and Financial Management, University of Piraeus, Greece; Financial Options Research Centre, Warwick Business School, University of Warwick, Greece)

Abstract

The fluctuation of shipping freight rates (freight rate risk) is an important source of market risk for all participants in the freight markets including hedge funds, commodity and energy producers. We measure the freight rate risk by the Value-at-Risk (VaR) approach. A range of parametric and non-parametric VaR methods is applied to various popular freight markets for dry and wet cargoes. Backtesting is conducted in two stages by means of statistical tests and a subjective loss function that uses the Expected Shortfall, respectively. We find that the simplest non-parametric methods should be used to measure freight rate risk. In addition, freight rate risk is greater in the wet cargoes markets. The margins in the growing freight derivatives markets should be set accordingly.

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Bibliographic Info

Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

Volume (Year): 11 (2008)
Issue (Month): 05 ()
Pages: 447-469

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Handle: RePEc:wsi:ijtafx:v:11:y:2008:i:05:p:447-469

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Related research

Keywords: Backtesting; expected shortfall; forward freight agreements; freight markets; freight rates; Value-at-Risk;

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Cited by:
  1. Alizadeh, Amir H., 2013. "Trading volume and volatility in the shipping forward freight market," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 49(1), pages 250-265.
  2. Goulas, Lambros & Skiadopoulos, George, 2012. "Are freight futures markets efficient? Evidence from IMAREX," International Journal of Forecasting, Elsevier, vol. 28(3), pages 644-659.
  3. Kostas Andriosopoulos & Nikos Nomikos, 2012. "Risk management in the energy markets and Value-at-Risk modelling: a Hybrid approach," RSCAS Working Papers 2012/47, European University Institute.

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