Volatility spillover through Capesize and Panamax freight markets: An integrated ISM model

Abstract

Although Capesize type vessels are specialised in iron ore transportation, they can also be used extensively in coal transportation. Panamax type vessels can also increase their share of iron ore cargoes, depending on the density in the Capesize market. This situation partially complicates the relationship between them and increases the need for an integrated model of relationships. In this direction, we analysed the volatility and risk spillover between commodity prices and freight markets with causality in variance test and Interpretive Structural Modelling (ISM) model, and we revealed a hierarchical structure in a single model. According to results, source of the risk and volatility in freight markets is the commodity prices and these prices are independent of each other. The volatility in commodity prices first spreads to the Panamax freight market and then to the Capesize freight market. Therefore, the Capesize stands out as the most dependent market to volatility.