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Economic return and volatility spillovers of derivatives markets on a number of assets have been extensively examined in the general economics literature. However, there are only a limited number of studies that investigate such interactions between freight rates and the freight futures, and no studies that also consider potential linkages with freight options. This study fills this gap by investigating the economic spillovers between time-charter rates, freight futures and freight options prices in the dry-bulk sector of the international shipping industry. Empirical results indicate the existence of significant information transmission in both returns and volatilities between the three related markets, which we attribute to varying trading activity and market liquidity. The results also point out that, consistent with theory, the freight futures market informationally leads the freight rate market, though surprisingly, freight options lag behind both futures and physical freight rates. The documented three-way economic interactions between the related markets can be used to enhance budget planning and risk management strategies, potentially attract more investors, and thus, improve the liquidity of the freight derivatives market.

The international shipping industry is susceptible to heightened market volatility manifested in significant freight rate fluctuations and thus diversifying and hedging the associated risks have become central to shipping business practice. Building on the extant literature on shipping freight derivatives, this study develops a portfolio-based methodological framework aiming to improve freight rate risk management. The study also offers, for the first time, evidence of the hedging performance of the recently developed container freight futures market. Our approach utilises portfolios of container, dry bulk and tanker freight futures along with corresponding portfolios of physical freight rates in order to improve the efficacy of risk diversification for shipping market practitioners. The empirical findings uncovered in this study have important implications for overall business, commercial, and hedging strategies in the shipping industry, while they can ultimately lead to a more liquid and efficient freight futures market.

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