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



    (Department of Economics, University of Peloponnese, Greece)



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

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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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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