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Understanding the fundamentals of freight markets volatility

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  • Lim, Kian Guan
  • Nomikos, Nikos K.
  • Yap, Nelson

Abstract

We analyse empirically the drivers of freight market volatility. We use several macroeconomic and shipping-related factors that are known to affect the supply and demand for shipping and examine their impact on the term structure of freight options implied volatilities (IV). We find that the level of IVs is affected by the level of the spot rate, the slope of the forward curve, as well as by both demand and supply factors, especially the former. We demonstrate that the relation between the volatility of futures prices and the slope of the forward curve is non-monotonic and convex, that is, it has a V-shape. In general, anticipation of economic growth and of a stronger freight market reduces IV whereas higher uncertainty and anticipation of excess shipping capacity may increase IV. Panel regressions as well as a series of robustness tests produce strong validation of the results.

Suggested Citation

  • Lim, Kian Guan & Nomikos, Nikos K. & Yap, Nelson, 2019. "Understanding the fundamentals of freight markets volatility," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 130(C), pages 1-15.
    • Handle: RePEc:eee:transe:v:130:y:2019:i:c:p:1-15
    DOI: 10.1016/j.tre.2019.08.003
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    7. Lourdes Gómez‐Valle & Ioannis Kyriakou & Julia Martínez‐Rodríguez & Nikos K. Nomikos, 2021. "Estimating risk‐neutral freight rate dynamics: A nonparametric approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(11), pages 1824-1842, November.
    8. Galán-Gutiérrez, Juan Antonio & Labeaga, José M. & Martín-García, Rodrigo, 2023. "Cointegration between high base metals prices and backwardation: Getting ready for the metals super-cycle," Resources Policy, Elsevier, vol. 81(C).
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    More about this item

    Keywords

    Freight options; Implied volatility; Economic modelling; Fundamental analysis;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • R40 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - General

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