Measuring the Market Risk of Freight Rates: A Value-at-Risk Approach

28 Pages Posted: 29 May 2007 Last revised: 24 Oct 2008

See all articles by Timotheos Angelidis

Timotheos Angelidis

University of Peloponnese - Department of Economics

George S. Skiadopoulos

Queen Mary, University of London, School of Economics and Finance; University of Piraeus

Date Written: 2008

Abstract

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.

Keywords: Backtesting, Expected Shortfall, Forward Freight Agreements, Freight Markets, Freight Rates, Value-at-Risk

JEL Classification: G10, G13

Suggested Citation

Angelidis, Timotheos and Skiadopoulos, George, Measuring the Market Risk of Freight Rates: A Value-at-Risk Approach (2008). International Journal of Theoretical and Applied Finance, Vol. 11, No. 5, pp. 447-469, 2008, Available at SSRN: https://ssrn.com/abstract=988739

Timotheos Angelidis

University of Peloponnese - Department of Economics ( email )

Tripolis, 22100
Greece

George Skiadopoulos (Contact Author)

Queen Mary, University of London, School of Economics and Finance

Lincoln's Inn Fields
Mile End Rd.
London, E1 4NS
United Kingdom

University of Piraeus ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

HOME PAGE: http://web.xrh.unipi.gr/faculty/gskiadopoulos/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,367
Abstract Views
5,109
rank
15,944
PlumX Metrics