Over-the-counter forward contracts and spot price volatility in shipping

• Published in: Transportation research. Part E, Logistics and transportation review Vol. 40; no. 4; pp. 273 - 296
• Main Authors: Kavussanos, Manolis G., Visvikis, Ilias D., Batchelor, Roy A.
• Format: Journal Article
• Language: English
• Published: Exeter Elsevier India Pvt Ltd 01.07.2004; Elsevier; Elsevier Sequoia S.A
• Series: Transportation Research Part E: Logistics and Transportation Review
• Subjects: Asymmetries; Derivatives; Derivatives trading; Forward exchange contracts; Market microstructure; Market microstructure Derivatives trading Volatility Asymmetries Shipping; Market structure; Shipping; Shipping industry; Studies; Volatility; Market microstructure; Derivatives trading; Volatility; G13; G14; Asymmetries; Shipping
• ISSN: 1366-5545; 1878-5794
• DOI: 10.1016/j.tre.2003.08.007

The purpose of this paper is to investigate the impact of the introduction of Forward Freight Agreement (FFA) trading on spot market price volatility in two panamax Atlantic (1 and 1A) and two panamax Pacific (2 and 2A) trading routes of the dry-bulk shipping industry. The results suggest that the onset of FFA trading: (a) decreased spot price volatility in all investigated routes, (b) has had an impact on the asymmetry of volatility in Pacific routes, and (c) substantially improved the quality and speed of information flow in three out of the four investigated routes. After introducing control variables, that may affect price volatility, the results indicate that only in voyage routes may the reduction in volatility be a direct consequence of FFA trading. It seems that the introduction of FFA trading has not had a detrimental effect on the spot market, with an improvement in the way information is transmitted into spot prices following the onset of FFA trading.