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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. The 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 Agreements (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 behavior 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. © 2021 The Authors.
Publisher Keywords: finite differences, forward freight agreements, freight rates, market price of risk, nonparametric estimation, risk‐neutral drift
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
Departments: Bayes Business School > Actuarial Science & Insurance
Date available in CRO: 16 Jul 2021 09:17
Date deposited: 16 July 2021
Date of acceptance: 22 June 2021
Date of first online publication: 15 July 2021
URI: https://openaccess.city.ac.uk/id/eprint/26448
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