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Is there accuracy of forward freight agreements in forecasting future freight rates? An empirical investigation

Evangelia Kasimati and Nikolaos Veraros
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Nikolaos Veraros: King’s College London

No 230, Working Papers from Bank of Greece

Abstract: Participants in the maritime industry place much interest in the Forward Freight Agreements (FFA/FFAs), being an indispensable tool for hedging shipping freight risk. Our paper innovates by directly comparing the FFA predictions with their actual future settlement prices as well as by examining contracts going forward as far as next calendar year. We combine straightforward comparison measurements with cointegration analysis to test for the accuracy and efficiency of the FFA projections. We find that FFAs display limited usefulness in predicting future freights, only slightly superior than simple naive models. The shorter the contract period and the smaller the vessel the better the forecast. We also find FFAs being relatively good predictors of future market direction but missing the turning points of the market cycles.

Keywords: Shipping; Freight Rates; Forward Freight Agreements; Forecasting; Vector Error Correction Models (search for similar items in EconPapers)
JEL-codes: C32 G13 G14 (search for similar items in EconPapers)
Pages: 38
Date: 2017-06
New Economics Papers: this item is included in nep-for and nep-tre
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