MEASURING THE MARKET RISK OF FREIGHT RATES: A VALUE-AT-RISK APPROACH

Timotheos Angelidis and George Skiadopoulos

International Journal of Theoretical and Applied Finance (IJTAF), 2008, vol. 11, issue 05, 447-469

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 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (11)

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DOI: 10.1142/S0219024908004889

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