Price Discovery, Causality and Forecasting in the Freight Futures Market

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

Nikos K. Nomikos

Cass Business School, City University London

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Date Written: 2003

Abstract

This paper investigates the causal relationship between futures and spot prices in the freight futures market. Being a thinly traded market whose underlying asset is a service, sets it apart from other markets investigated so far in the literature. Causality tests, generalised impulse response analysis and forecasting performance evaluation indicate that futures prices tend to discover new information more rapidly than spot prices. Revisions in the composition of the underlying index to make it more homogeneous, have strengthened the price discovery role of futures prices. The information incorporated in futures prices, when formulated as a VECM, produces more accurate forecasts of spot prices than the VAR, ARIMA and random-walk models, over several steps ahead.

Keywords: Futures markets, Forecasting, Granger causality, Generalised impulse analysis, Shipping

JEL Classification: G13

Suggested Citation

Kavussanos, Manolis G. and Nomikos, Nikos K., Price Discovery, Causality and Forecasting in the Freight Futures Market (2003). Review of Derivatives Research, Vol. 6, No. 3, 2003, 203 -230 . Available at SSRN: https://ssrn.com/abstract=2384767

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)

Nikos K. Nomikos

Cass Business School, City University London ( email )

London, EC2Y 8HB
Great Britain

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