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IS THERE ACCURACY OF FORWARD FREIGHT AGREEMENTS IN FORECASTING FUTURE FREIGHT RATES? AN EMPIRICAL INVESTIGATION

 

 

 

Evangelia Kasimati

Bank of Greece

 

Nikolaos Veraros

King’s College London

 

 

 

 

Abstract

Participants in the maritime industry place much interest in the Forward Freight Agreements (FFA/FFAs), being an indispensable tool for hedging shipping freight risk. Our paper innovates by directly comparing the FFA predictions with their actual future settlement prices as well as by examining contracts going forward as far as next calendar year. We combine straightforward comparison measurements with cointegration analysis to test for the accuracy and efficiency of the FFA projections. We find that FFAs display limited usefulness in predicting future freights, only slightly superior than simple naïve models. The shorter the contract period and the smaller the vessel the better the forecast. We also find FFAs being relatively good predictors of future market direction but missing the turning points of the market cycles.

 

 

JEL-classifications: C32, G13, G14

 

Keywords: Shipping, Freight Rates, Forward Freight Agreements, Forecasting, Vector Error Correction Models

 

 

Acknowledgments: The authors would like to particularly thank Stefanos Frangos from Navios who kindly provided access to all required data series. The views in this paper are those of the author and do not necessarily reflect those of the Bank of Greece.

 

 

 

Correspondence:

Evangelia Kasimati,

Bank of Greece,

Eleftheriou Venizelou 21,

Athens 10250, Greece,

Tel: +30 210 3202649,

ekasimati@bankofgreece.gr

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