Market Risk Model Selection and Medium-Term Risk with Limited Data: Application to Ocean Tanker Freight Markets

Posted: 7 Feb 2014

See all articles by Manolis G. Kavussanos

Manolis G. Kavussanos

Athens University of Economics and Business - Department of Accounting and Finance

Dimitris Dimitrakopoulos

Independent

Date Written: 2011

Abstract

The estimation of medium-term market risk dictated by limited data availability, is a challenging issue of concern amongst academics and practitioners. This paper addresses the issue by exploiting the concepts of volatility and quantile scaling in order to determine the best method for extrapolating medium-term risk forecasts from high frequency data. Additionally, market risk model selection is investigated for a new dataset on ocean tanker freight rates, which refer to the income of the capital good - tanker vessels. Certain idiosyncrasies inherent in the very competitive shipping freight rate markets, such as excessive volatility, cyclicality of returns and the medium-term investment horizons - found in few other markets - make these issues challenging. Findings indicate that medium-term risk exposures can be estimated accurately by using an empirical scaling law which outperforms the conventional scaling laws of the square and tail index root of time. Regarding the market risk model selection for short-term investment horizons, findings contradict most studies on conventional financial assets: interestingly, freight rate market risk quantification favors simpler specifications, such as the GARCH and the historical simulation models.

Keywords: Freight rate risk, Shipping, Tankers, Value at Risk, Expected tail loss

JEL Classification: G1, L9

Suggested Citation

Kavussanos, Manolis G. and Dimitrakopoulos, Dimitris, Market Risk Model Selection and Medium-Term Risk with Limited Data: Application to Ocean Tanker Freight Markets (2011). International Review of Financial Analysis, Vol. 20, 2011 258-268. Available at SSRN: https://ssrn.com/abstract=2384695

Manolis G. Kavussanos (Contact Author)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission St
TK 104 34 Athens
Greece
0030 210 8203167 (Phone)
0030 210 8228816 (Fax)

Dimitris Dimitrakopoulos

Independent ( email )

No Address Available

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