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Is there accuracy of forward freight agreements in forecasting future freight rates? An empirical investigation

Author

Listed:
  • Evangelia Kasimati

    (Bank of Greece)

  • Nikolaos Veraros

    (King’s College London)

Abstract

Participants in the maritime industry place much interest in the Forward Freight Agreements (FFA/FFAs), being an indispensable tool for hedging shipping freight risk. Our paper innovates by directly comparing the FFA predictions with their actual future settlement prices as well as by examining contracts going forward as far as next calendar year. We combine straightforward comparison measurements with cointegration analysis to test for the accuracy and efficiency of the FFA projections. We find that FFAs display limited usefulness in predicting future freights, only slightly superior than simple naive models. The shorter the contract period and the smaller the vessel the better the forecast. We also find FFAs being relatively good predictors of future market direction but missing the turning points of the market cycles.

Suggested Citation

  • Evangelia Kasimati & Nikolaos Veraros, 2017. "Is there accuracy of forward freight agreements in forecasting future freight rates? An empirical investigation," Working Papers 230, Bank of Greece.
    • Handle: RePEc:bog:wpaper:230
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    Cited by:

    1. Zaili Yang & Esin Erol Mehmed, 2019. "Artificial neural networks in freight rate forecasting," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 21(3), pages 390-414, September.
    2. Pelagidis, Theodore & Panagiotopoulos, George, 2019. "Forward Freight Agreements and Market Transparency in the Capesizs Sector," MPRA Paper 107035, University Library of Munich, Germany.

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    More about this item

    Keywords

    Shipping; Freight Rates; Forward Freight Agreements; Forecasting; Vector Error Correction Models;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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