Volatility Spillovers in Capesize Forward Freight Agreement Markets

Abstract

This paper is to investigate spillovers in the Capesize forward freight agreements (FFAs) markets before and after the global financial crisis. The paper chooses four Capesize voyage routes FFAs (C3, C4, C5, and C7), two time-charter routes FFAs (BCIT/C average, BPI T/C average), and spot rates as research subjects, covering the periods 3 January 2006 to 24 December 2015. This paper applies Volatility Spillover Multivariate Stochastic Volatility (VS-MSV) model to analyze volatility spillover effects and estimates the parameters via software of Bayesian inference using Gibbs Sampling (BUGS), the deviance information criterion (DIC) used for goodness-of-fit model. The results suggest that there are volatility spillover effects in certain Capesize FFAs routes, and the effects from spot rates to FFAs take place before crisis, yet they are bilateral after crisis. With the development of shipping markets, the correlations between FFAs and spot rate are enhanced, and it seems that the effects depend on market information and traders' behavior. So practitioners could make decisions according to the spillovers.