Risk and Volatility Spillover Between Commodity and Freight Market An Application on Capesize Freight Market

Abstract

Uncertainty in freight rates poses great risks for ship and cargo owners. Identifying the factors that affect the volatility of freight is of great importance in reducing risks arising from uncertainty. The aim of this study is to investigate the volatility spillover and risk transmission between commodity prices and freight rates in Capesize market through the causality in variance test. In the study, 3 different transportation routes are included for Capesize freights, while the prices of the 3 main cargo carried in the dry bulk market are considered as commodity prices. Dataset consists of 234 monthly observations and covers the dates between January 2000 and June 2019. According to the results obtained, while unidirectional significant causalities are determined from both iron ore and coal prices to all freight routes, bidirectional significant causalities are determined between wheat prices and freights.

Keywords

• Commodity price
• volatility spillover
• causality in variance

Abstract

Gemi ve yük sahipleri için navlunlarda yaşanan belirsizlik büyük riskler oluşturmaktadır. Navlunların oynaklığını etkileyen faktörlerin tespit edilmesi, belirsizlikten kaynaklı risklerin azaltılmasında büyük önem arz etmektedir. Bu çalışmanın amacı, emtia fiyatları ile Capesize piyasasındaki navlun fiyatları arasındaki oynaklık yayılımını ve risk transferini varyansta nedensellik testi aracılığıyla incelemektir. Çalışmada Capesize navlunları için 3 farklı taşımacılık rotası içerilirken, emtia fiyatları olarak ise kuru dökme yük piyasasında taşınan 3 ana yükün fiyatları ele alınmaktadır. Veri seti 234 aylık gözlemlerden oluşmaktadır ve Ocak 2000 ile Haziran 2019 dönemi arasını kapsamaktadır. Elde edilen sonuçlara göre hem demir cevheri hem de kömür fiyatlarından tüm navlunlara anlamlı nedensellikler tespit edilmişken, buğday fiyatı ve navlunlar arasında ise karşılıklı anlamlı nedensellikler tespit edilmiştir.

Keywords

• Emtia fiyatı
• oynaklık yayılımı
• varyansta nedensellik.

References

1. Açık, A. and Başer, S.Ö. (2017). “Economies of Scale in Seaborne Coal Transportation: A Case Study of İSDEMİR Port”. Journal of Transportation and Logistics, 2(2): 11-20.
2. Açık, A. and Başer, S.Ö. (2018a). “An Analytical Study on The Likely Causes of The Minor Bubbles in the Baltic Dry Index”. International Journal of Logistics Economics and Globalisation, 7(4): 353-365.
3. Açık, A. and Başer, S.Ö. (2018b). “The Effects of Fast Decline in Crude Oil Prices on the Tanker Market in The Short Run”. Dokuz Eylül Üniversitesi Denizcilik Fakültesi Dergisi, 10(1): 61-82.
4. Açık, A. and Başer, S.Ö. (2019). “Impact of Commodity Price on Freight Market Considering The 2008 Crisis: An Investigation of Iron Ore Price and Capesize Shipping Rates”. II. Business & Organization Research Conference Full Text Book. Organized by. İzmir: Yaşar University: 1087-1099.
5. Açık, A. and Başer, S.Ö. (2020). “Asymmetric Causality from Commodity Prices to Shipping Markets: An Empirical Research on Istfix Region”. World Review of Intermodal Transportation Research (Accepted publication).
6. Açık, A. and İnce, M.R. (2019). “Do Commodity Price Shocks Matter For Dry Bulk Freight Markets?” In: Studies on Social Sciences. Ankara: İKSAD Publishing House, 77-101.
7. Adland, R. and Koekebakker, S. (2004). “Market Efficiency in the Second-Hand Market for Bulk Ships”. Maritime Economics & Logistics, 6: 1–15.
8. Afonso, A. and Teixeira, J. (1999). “Non-Linear Tests of Weakly Efficient Markets: Evidence from Portugal”. ISEG Economics Department Working Paper, 6/98.

9. Alghalith, M. (2010). “The Interaction Between Food Prices and Oil Prices”. Energy Economics, 32: 1520–1522.
10. Alom, F., Ward, B. and Baiding, H. (2011). “Spillover Effects of World Oil Prices on Food Prices: Evidence from Asia and Pacific Countries”. 52nd New Zealand Association of Economists Annual Conference. Wellington: New Zealand.
11. Angelopoulos, J., Sahoo, S. and Visvikis, I. D. (2020). “Commodity and Transportation Economic Market Interactions Revisited: New Evidence from A Dynamic Factor Model”. Transportation Research Part E: Logistics and Transportation Review, 133: 1-15.
12. Başer, S.Ö. and Açık, A. (2019). “Do Commodity Prices Matter for Second Hand Values? An Empirical Research on Capesize Market”. Turkish Journal of Maritime and Marine Sciences, 5(1): 44-52.
13. Başer, S.Ö. and Açık, A. (2018). “The Response of Shipbuilding Activities to Freight Rates”, Uluslararası İktisadi ve İdari Bilimler Dergisi, 4(1): 120-136.
14. Bayat, T., Nazlioglu, S. and Kayhan, S. (2015). “Exchange Rate and Oil Price Interactions in Transition Economies: Czech Republic, Hungary and Poland”. Panoeconomicus, 62(3): 267-285.
15. Beenstock, M. and Vergottis, A. (1993). Econometric Modelling of World Shipping. London: Chapman & Hall.
16. Bendall, H. and Stent, A.F. (2005). “Investment Strategies in Market Uncertainty”. In: International Maritime Transport: Perspectives. London: Routledge, 13-23.
17. Bhattarai, K. and Margariti, V. (2018). “An Empirical Test of the Theory of Efficient Markets of Stock Prices”. Finance and Market, 3(2): 1-30.
18. Bildirici, M. E. and Turkmen, C. (2015). “Nonlinear Causality between Oil and Precious Metals”, Resources Policy, 46: 202-211.
19. Blasco, N., Del Rio, C. and Santamaría, R. (1997). “The Random Walk Hypothesis in The Spanish Stock Market: 1980–1992”, Journal of Business Finance & Accounting, 24(5): 667-684.
20. Bloomberg. (2019). Freight Rate Data. https://www.bloomberg.com/professional/, 20.07.2019.
21. Branch, A. (2007). Elements of Shipping (8th ed). London: Routledge.
22. Brock,W., Dechect,W. and Scheinkman, J. (1987). “A Test for Independence Based on The Correlation Dimension”. Working Paper. Department of Economics, University of Wisconsin, Madison.
23. Buxton, L., Daggitt, R.B. and King, J. (1978). Cargo Access Equipment for Merchant Ships. London: MacGregor Publications Ltd.
24. Cheung, Y. W. and Ng, L. K. (1996). “A Causality-In-Variance Test and Its Application to Financial Market Prices”, Journal of econometrics, 72(1-2): 33-48.
25. Chevallier, J. and Ielpo, F. (2013). The Economics of Commodity Markets. London: John Wiley & Sons.
26. Chou, M. T., Su, Y. L., Chou, T. Y., and Liang, H. U. (2015). “An Analysis of The Relationship between Asian Steel Index and the Baltic Capsize Index”, Modern Economy, 6(2): 207-216.
27. Dorina, L. and Simina, U. (2007). “Testing Efficiency of The Stock Market in Emerging Economies”. The Journal of the Faculty of Economics-Economic Science Series, 2: 827-831.
28. Engle, R. F. (1982). “Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation”. Econometrica: Journal of the Econometric Society, 50(4): 987-1007.
29. Fess, T.L., Kotcon, J.B. and Benedito, V.A. (2015). “Crop Breeding for Low Input Agriculture: A Sustainable Response to Feed a Growing World Population”. In: Agricultural Resource Use and Management. Toronto: Apple Academic Press, 251-294.
30. Hafner, C. M. and Herwartz, H. (2006). “A Lagrange Multiplier Test for Causality in Variance”. Economics Letters, 93(1): 137-141.
31. Harlaftis, G. and Theotokas, J. (2002). “Maritime Business During The 20th Century: Continuity and Changes”. In: The Handbook of Maritime Economics and Business. London: Lloyd’s of London Press: 3-34.
32. Karakitsos, E. and Varnavides, L. (2014). Maritime Economics: A Macroeconomic Approach. London: Springer.
33. Kavussanos, M., Visvikis, I., and Dimitrakopoulos, D. (2010). “Information Linkages between Panamax Freight Derivatives and Commodity Derivatives Markets”. Maritime Economics and Logistics, 12(1): 91-110.
34. Kavussanos, M.G., Visvikis, I.D., and Dimitrakopoulos, D.N. (2014). “Economic Spillovers Between Related Derivatives Markets: The Case of Commodity and Freight Markets”. Transportation Research Part E, 68: 79–102.
35. Koopmans, T. C. (1939) Tanker Freight Rates and Tankship Building. Holland: Haarlem.
36. Koseoglu, S. D. and Cevik, E. I. (2013). “Testing for Causality in Mean and Variance Between the Stock Market and The Foreign Exchange Market: An Application to The Major Central and Eastern European Countries”. Finance a Uver, 63(1): 65-86.
37. Lee, J. and Strazicich, M. C. (2003). “Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks”. The Review of Economics and Statistics, 85(4): 1082-1089.
38. Lee, J. and Strazicich, M. C. (2013). “Minimum LM Unit Root Test with One Structural Break”. Economics Bulletin, 33(4): 2483-2492.
39. Lim, K. P. and Brooks, R. (2011). “The Evolution of Stock Market Efficiency Over Time: A Survey of The Empirical Literature”. Journal of Economic Surveys, 25(1): 69-108.
40. Ljung, G. M. and Box, G. E. (1978). “On A Measure of Lack of Fit in Time Series Models”. Biometrika, 65(2): 297-303.
41. Lun, Y. V. and Quaddus, M. A. (2008). “An Empirical Model of the Bulk Shipping Market”. International Journal of Shipping and Transport Logistics, 1(1): 37-54.
42. Månsson, K. and Shukur, G. (2009). “Granger Causality Test in The Presence of Spillover Effects”. Communications in Statistics-Simulation and Computation, 38(10): 2039-2059.
43. Marcus, H.S. (1987). Marine Transportation Management. London: Routledge.
44. Meersman, H., Chen, S., Van de Voorde, E. and Frouws, K. (2014). Modelling and Forecasting in Dry Bulk Shipping. Informa Law from Routledge.
45. Narayan, P. K. and Popp, S. (2010). “A New Unit Root Test with Two Structural Breaks in Level and Slope at Unknown Time”. Journal of Applied Statistics, 37(9): 1425-1438.
46. Nazlioglu, S., Erdem, C. and Soytas, U. (2013). “Volatility Spillover Between Oil and Agricultural Commodity Markets”. Energy Economics, 36: 658-665.
47. Parameswaran, B. (2004). The liberalization of maritime transport services: With special reference to the WTO/GATS framework (Vol. 1). Hamburg: Springer Science & Business Media.
48. Radetzki, M. (2008). A Handbook of Primary Commodities in the Global Economy. New York: Cambridge University Press.
49. Stopford, M. (2009). Maritime Economics. London and New York: Routledge.
50. Tsolakis, S. (2005). Econometric Analysis of Bulk Shipping Markets: Implications for Investment Strategies and Financial Decision-Making (Published Doctoral Thesis). Rotterdam: Erasmus University.
51. Tvedt, J. (2003). “A New Perspective on Price Dynamics of The Dry Bulk Market”. Maritime Policy & Management, 30(3): 221-230.
52. UNCTAD (2019a). Review of Maritime Transport 2019. https://unctad.org/en/PublicationsLibrary/rmt2019_en.pdf, 17.01.2020.
53. Wilmsmeier, G. (2014). International Maritime Transport Costs. UK: Ashgate.
54. WorldBank. (2019). Monthly Commodity Prices. https://www.worldbank.org/en/research/commodity-markets, 28.12.2019.
55. Zivot, E. and Andrews, D. W. K. (2002). “Further Evidence on the Great Crash, The Oil-Price Shock, and The Unit-Root Hypothesis”. Journal of Business & Economic Statistics, 20(1): 25-44.