Freight options: Price modelling and empirical analysis

Abstract

This is the accepted version of the paper. This version of the publication may differ from the final published version. Permanent repository link: http://openaccess.city.ac.uk/12201/ Link to published version: http://dx.

Income uncertainty and the decision to invest in bulk shipping

“…On the other hand, low freight rates result in reduction in operating performance and divestment either in the form of laying‐up vessels or even scrapping; the combined effect is a reduction in the supply of services and an increase in the level of freight rates. Mean‐reversion in freight rates is also observed in the volatility term structure of forward contracts as longer maturity contracts, in general, tend to have lower volatility than short‐term ones as noted in Nomikos et al ().…”

“…Previously, the freight rate dynamics has been modeled by a geometric Brownian motion (e.g., see Andersen, 1992;Koekebakker, Adland, & Sødal, 2007). Nomikos, Kyriakou, Papapostolou, and Pouliasis (2013) augmented the original model by jumps of normal size (Merton model) to account for upside jumps in the spot freight rates, due to the inability of supply to immediately respond to increased demand for seaborne trade, but also downside movements during market recessions. Mean-reverting variations by means of an Ornstein-Uhlenbeck (OU) model have also been considered in earlier communications, including Bjerksund and Ekern (1995), Alesii (2005), Sødal, Koekebakker, and Aadland (2008), Sødal, Koekebakker, and Adland (2009), and Jørgensen and De Giovanni (2010) to name but a few, in order to describe the tendency of freight rates towards the long-run cost of transportation service provision.…”

Jumps and stochastic volatility in crude oil prices and advances in average option pricing

“…Currently, liquidity in the freight options market is focused on the indices in the Capesize and Panamax drybulk sectors (see Nomikos et al 2013). …”

Stochastic modeling of Supramax spot and forward freight rates

“…Some recent studies suggest more realistic freight rate dynamics. Nomikos et al (2013) suggest jumpdiffusion models that can capture the fat tails of freight rate logarithmic returns (log-returns). They develop a theoretical option pricing model tailor-made for financial shipping options, and they find that a jump-diffusion model gives a better fit to option data, compared with the traditional geometric Brownian model.…”