Title: A two-state Markov-switching distinctive conditional variance application for tanker freight returns

Authors: Wessam Abouarghoub; Iris Biefang-Frisancho Mariscal; Peter Howells

Addresses: Centre for Global Finance, Bristol Business School, University of the West of England (UWE), Bristol, UK ' Centre for Global Finance, Bristol Business School, University of the West of England (UWE), Bristol, UK ' Centre for Global Finance, Bristol Business School, University of the West of England (UWE), Bristol, UK

Abstract: The few papers that explore different ways to measure shipping freight dynamics have differed in their interpretation of the most suitable measure for conditional freight volatility and consequently for the most appropriate freight risk measure. Furthermore, recent empirical work in maritime studies suggests the possibility of conditional freight volatility switching between different regime states that are dynamically distinct. This paper attributes these dissimilarities in findings within maritime literature to the possibility of freight returns switching between distinctive volatility structures. Therefore, it proposes a two-state Markov-switching distinctive conditional variance model by matching the two-state conditional freight variance to the most suitable GARCH specification. This provides for the first time a distinctive empirical insight into the dynamics of tanker freight rates by explaining the dissimilarities within the maritime literature in measuring freight risk that improves our understanding of the changes in volatility dynamics of the freight supply curve.

Keywords: Markov switching; tanker freights; freight risk; freight supply curve; freight volatility dynamics; distinctive conditional variance; tanker freight returns; shipping freight dynamics; risk measurement; risk management.

DOI: 10.1504/IJFERM.2014.058762

International Journal of Financial Engineering and Risk Management, 2014 Vol.1 No.3, pp.239 - 263

Received: 15 Oct 2012
Accepted: 15 May 2013
Published online: 21 Oct 2014 *

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