Liquidity effects and FFA returns in the international shipping derivatives market

Abstract

The study examines the impact of liquidity risk on freight derivatives returns. The Amihud liquidity ratio and bid-ask spreads are utilized to assess the existence of liquidity risk in the freight derivatives market. Other macroeconomic variables are used to control for market risk. Results indicate that liquidity risk is priced and both liquidity measures have a significant role in determining freight derivatives returns. Consistent with expectations, both liquidity measures are found to have positive and significant effects on the returns of freight derivatives. The results have important implications for modeling freight derivatives, and consequently, for trading and risk management purposes.

Economic information transmissions and liquidity between shipping markets: New evidence from freight derivatives

“…In addition, market liquidity is important for the absorption of new market information since lower market liquidity can generate a higher illiquidity risk premium, and in turn lead to more pronounced market frictions and slower incorporation of information. In the freight derivatives market, the study of Alizadeh et al (2015) is the only one examining the liquidity of freight futures contracts, using the Amihud illiquidity measure (Amihud, 2002). Although the freight options market is considered less liquid compared to the freight futures market based on trading volumes, there exists no study measuring the relative liquidity of freight options.…”

Modeling the determinants of dry bulk FFA trading volume from a cross-market perspective of spot and forward

“…5. According to (Alizadeh et al 2015a), Thursday's FFA prices are used to represent the weekly prices to avoid the possible bias due to the weekend effects.…”

“…As an important hedging tool, the forward freight agreement (FFA) plays a significant role in risk management in the dry bulk and tanker markets. An FFA is defined as a cash-settled contract between two counterparties to settle a freight rate for a specified quantity of cargo or hire rate type of vessel in one or a basket of the major shipping routes in the dry bulk and tanker shipping sectors at a certain date in the future (Alizadeh et al, 2015a). Because of its remarkable value for the shipping theory and the industrial practice, FFA draws much attention in the academic field.…”

“…Nomikos and Doctor (2013) carry out a comprehensive study on the quantitative trading strategies in the FFA market for various contracts and maturities with different trading rules. Alizadeh et al (2015a) investigate the impact of liquidity risk on FFA returns. Alizadeh et al (2015b) examine the effectiveness of alternative hedging methods in managing tanker freight rate risk based on Tanker FFAs.…”

Shipping Firms’ Efficiency Evaluation through Stochastic Frontier Analysis

“…However, in this study we focus on the financial perspective which directly affects the firm's performance. According to [12] financial risks in the shipping sector could be classified as default, credit, market, financial and liquidity. Each category can be quantified by the indicators defined in Table 6.…”