The impact of conditional higher moments on risk management: The case of the tanker freight market

Van Dellen, S., Alizadeh, A.H. and Nomikos, N.K 2017. The impact of conditional higher moments on risk management: The case of the tanker freight market. 25th Annual Conference of the International Association of Maritime Economists. Kyoto, Japan 27 - 30 Jun 2017

TitleThe impact of conditional higher moments on risk management: The case of the tanker freight market
AuthorsVan Dellen, S., Alizadeh, A.H. and Nomikos, N.K
TypeConference paper
Abstract

Tanker shipping provides the primary means of transportation for almost types of petroleum product traded globally. It is therefore essential to the energy supply chain to be able to correctly evaluate the structure and risk associated with freight rates in this market. This paper examines the concepts of conditional skewness and kurtosis in tanker freight rate. This is because, although the departure from normality of asset returns has been well documented, the relatively recent introduction of the concepts of conditional skewness and conditional kurtosis into the financial market literature, together with the unique shape of the supply curve in shipping markets, means that this has not been fully examined in the shipping literature. This is crucial given that a failure to take these structural characteristics into account could lead to market participants underestimating the probability of extreme and unfavourable events and therefore the consequent risk associated with market operations. Examining a sample of three types of tanker freight rate returns, we find that tanker freight rate returns exhibit conditional higher moments and that models that incorporate conditional skewness and kurtosis provide a more accurate value-at-risk measure and therefore a more accurate measure of the true risk faced by market participants.

KeywordsShipping
Conditional skewness
Conditional kurtosis
Conditional volatility
Value-at-Risk
GARCHSK model
Year2017
Conference25th Annual Conference of the International Association of Maritime Economists
Accepted author manuscriptIAME 2017 (Final Paper Submission).pdf

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