Price Discovery, Causality and Forecasting in the Freight Futures Market

40 Pages Posted: 23 May 2001

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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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, which is in line with the empirical evidence from other markets. Sub-period results, corresponding to revisions in the composition of the underlying index, show that the price discovery role of futures prices has strengthened as a result of the more homogeneous composition of the index in the recent years. This also indicates that the restructuring of the underlying index in November 1999, to reflect trade flows which are homogeneous in terms of commodities and cargo sizes, may have a beneficial impact on the market. Finally, the information incorporated into futures prices, when formulated as a VECM, produces more accurate forecasts of the spot prices than the VAR, ARIMA and random-walk models, over several steps ahead.

Keywords: Futures Markets, Forecasting, Granger Causality, Generalised Impulse Response Analysis, Shipping.

JEL Classification: G13

Suggested Citation

Kavussanos, Manolis G. and Nomikos, Nikos K., Price Discovery, Causality and Forecasting in the Freight Futures Market. EFMA 2001 Lugano Meetings; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=271072 or http://dx.doi.org/10.2139/ssrn.271072

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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