Multivariate Modeling and Analysis of Regional Ocean Freight Rates

32 Pages Posted: 16 May 2017

See all articles by Roar Adland

Roar Adland

Norwegian School of Economics (NHH)

Fred Espen Benth

University of Oslo

Steen Koekebakker

School of Business and Law at the University of Agder

Date Written: May 16, 2017

Abstract

In this paper, we propose a new multivariate model for the dynamics of regional ocean freight rates. We show that a cointegrated system of regional spot freight rates can be decomposed into a common non-stationary market factor and stationary regional deviations. The resulting integrated CAR process is new to the literature. By interpreting the common market factor as the global arithmetic average of the regional rates, both the market factor and the regional deviations are observable which simplifies the calibration of the model. Moreover, forward contracts on the market factor can be traded in the Forward Freight Agreement (FFA) market. We calibrate the model to historical spot rate processes and illustrate the term structures of volatility and correlation between the regional prices and the market factor. Our model is an important contribution towards improved modelling and hedging of regional price risk when derivative market liquidity is concentrated in a single global benchmark.

Keywords: Freight rates, autoregressive models in continuous time, cointegration, Forward freight agreements

JEL Classification: C31, G13, R41

Suggested Citation

Adland, Roar and Benth, Fred Espen and Koekebakker, Steen, Multivariate Modeling and Analysis of Regional Ocean Freight Rates (May 16, 2017). Available at SSRN: https://ssrn.com/abstract=2968773 or http://dx.doi.org/10.2139/ssrn.2968773

Roar Adland

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

Fred Espen Benth (Contact Author)

University of Oslo ( email )

Center of Mathematics for Applications
Oslo, N-0317
Norway

Steen Koekebakker

School of Business and Law at the University of Agder ( email )

Servicebox 422
Kristiansand, N-4604
Norway
+47 38 14 15 31 (Phone)

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