City Research Online

Estimating risk-neutral freight rate dynamics: A nonparametric approach

Gomez-Valle, L., Kyriakou, I. ORCID: 0000-0001-9592-596X, Martinez-Rodriguez, J. and Nomikos, N. ORCID: 0000-0003-1621-2991 (2021). Estimating risk-neutral freight rate dynamics: A nonparametric approach. Journal of Futures Markets, doi: 10.1002/fut.22244

Abstract

We present a new method for estimating the unobservable drift of the risk-neutral spot freight rate process from Forward Freight Agreement (FFA) prices in the absence of a closed-form solution and demonstrate robustness via numerical simulations. Moreover, we conduct empirical experiments involving estimation of standard parametric models and a nonparametric model using Baltic Exchange data. We find that our nonparametric approach yields the lowest FFA pricing errors across maturities. Finally, we estimate the market price of risk, analyze its behaviour in-sample and out-of-sample and observe that, when estimated using our nonparametric approach, it evolves consistently with the indices under study.

Publication Type: Article
Additional Information: This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.
Publisher Keywords: Freight rates, nonparametric estimation, finite differences, risk-neutral drift, market price of risk, forward freight agreement
Subjects: H Social Sciences > HG Finance
Departments: Business School > Finance
Date available in CRO: 02 Jul 2021 11:23
Date deposited: 2 July 2021
Date of acceptance: 22 June 2021
Date of first online publication: 15 July 2021
URI: https://openaccess.city.ac.uk/id/eprint/26350
[img]
Preview
Text - Published Version
Available under License Creative Commons Attribution Non-commercial No Derivatives.

Download (2MB) | Preview

Export

Downloads

Downloads per month over past year

View more statistics

Actions (login required)

Admin Login Admin Login