van Dellen, S., Alizadeh, A.H. and Huang, C.-Y. 2015. A regime switching approach for hedging tanker shipping freight rates. Energy Economics. 49, pp. 44-59. https://doi.org/10.1016/j.eneco.2015.01.004
| Title | A regime switching approach for hedging tanker shipping freight rates |
|---|---|
| Type | Journal article |
| Authors | van Dellen, S., Alizadeh, A.H. and Huang, C.-Y. |
| Abstract | Tanker shipping is the primary means for the transportation of petroleum and petroleum products around the world and thus plays a crucial role in the energy supply chain. However, the high volatility of tanker freight rates has been a major concern for market participants and led to the development of the tanker freight derivatives in the form of forward freight agreements (FFAs). The aim of this paper is to investigate the performance of these instruments in managing tanker freight rate risk. Using a data set for six major tanker routes covering the period between 2005 and 2013, we examine the effectiveness of alternative hedging methods, including a bivariate Markov Regime Switching GARCH model, in hedging tanker freight rates. The regime switching GARCH specification links the concept of equilibrium freight rate determination underlying different market conditions and the dynamics of the conditional second moments across high and low volatility regimes. Overall, we find evidence supporting the argument that the tanker freight market is characterized by different regimes. However, while the use of a regime switching model allows for a significant improvement in the performance of the hedge in-sample, out-of-sample results are mixed. |
| Keywords | Regime switching, hedging, tanker, shipping, risk management |
| Journal | Energy Economics |
| Journal citation | 49, pp. 44-59 |
| ISSN | 0140-9883 |
| Year | 2015 |
| Publisher | Elsevier |
| Accepted author manuscript | File Access Level Open (open metadata and files) |
| Digital Object Identifier (DOI) | https://doi.org/10.1016/j.eneco.2015.01.004 |
| Web address (URL) | http://dx.doi.org/10.1016/j.eneco.2015.01.004 |
| Publication dates | |
| Published in print | May 2015 |
| Published online | 27 Jan 2015 |