An Application of Dynamic Factor Model to Dry Bulk Market

In this paper, we propose a new multivariate model for the dynamics of regional ocean freight rates. We show that a cointegrated system of regional spot freight rates can be decomposed into a common non-stationary market factor and stationary regional deviations. The resulting integrated CAR process is new to the literature. By interpreting the common market factor as the global arithmetic average of the regional rates, both the market factor and the regional deviations are observable which simplifies the calibration of the model. Moreover, forward contracts on the market factor can be traded in the Forward Freight Agreement (FFA) market. We calibrate the model to historical spot rate processes and illustrate the term structures of volatility and correlation between the regional prices and the market factor. Our model is an important contribution towards improved modelling and hedging of regional price risk when derivative market liquidity is concentrated in a single global benchmark.

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Dynamics of Dry Bulk Freight Market: Through the Lens of a Common Stochastic Trend Model

Ko¹

2011

The Asian Journal of Shipping and Logistics

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An Application of Dynamic Factor Model to Dry Bulk Market

Cited by 9 publications

References 9 publications

Analysis of Term Structure in Dry Bulk Freight Market

Analysis of Term Structure in Dry Bulk Freight Market

Multivariate modeling and analysis of regional ocean freight rates

Dynamics of Dry Bulk Freight Market: Through the Lens of a Common Stochastic Trend Model

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