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Understanding the fundamentals of freight markets volatility

Lim, K. G., Nomikos, N. ORCID: 0000-0003-1621-2991 and Yap, N. (2019). Understanding the fundamentals of freight markets volatility. Transportation Research Part E: Logistics and Transportation Review, 130, pp. 1-15. doi: 10.1016/j.tre.2019.08.003

Abstract

We analyse empirically the drivers of freight market volatility. We use several macroeconomic and shipping-related factors that are known to affect the supply and demand for shipping and examine their impact on the term structure of freight options implied volatilities (IV). We find that the level of IVs is affected by the level of the spot rate, the slope of the forward curve, as well as by both demand and supply factors, especially the former. We demonstrate that the relation between the volatility of futures prices and the slope of the forward curve is non-monotonic and convex, that is, it has a V-shape. In general, anticipation of economic growth and of a stronger freight market reduces IV whereas higher uncertainty and anticipation of excess shipping capacity may increase IV. Panel regressions as well as a series of robustness tests produce strong validation of the results.

Publication Type: Article
Publisher Keywords: Freight options, Implied volatility, Economic modelling, Fundamental analysis
Subjects: H Social Sciences > HE Transportation and Communications
H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/22733
[img] Text - Accepted Version
This document is not freely accessible until 26 August 2020 due to copyright restrictions.
Available under License Creative Commons Attribution Non-commercial No Derivatives.

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