Risk management, price discovery and forecasting in the freight futures market

Doctoral thesis English OPEN
Nomikos, N.
  • Subject: HB

The success or failure of a futures contract is determined by its ability to provide benefits to economic agents, over and above the benefits they derive from the spot market. These benefits are price discovery and risk management through hedging. The extent to which different commodity and financial futures markets have served as efficient centres of price discovery and risk management has been the focus of considerable empirical research in the literature. The evidence however, on the BIFFEX market is very limited. This thesis therefore, by investigating these issues provides new evidence in the literature for a futures market with some unique characteristics such as the trading of a service and thin trading. Our empirical results are summarised as follows. First, the BIFFEX market performs its price discovery function efficiently since futures prices in the market contribute to the discovery ofnew information regarding both current and expected BFI prices. Second, futures prices fail to reduce market risk to the extent evidenced in other markets in the literature and, hence, the market does not perform its risk management function satisfactorily; this is thought to be the result of the heterogeneous composition of the underlying index. Sub-period analysis, corresponding to revisions in the composition of the underlying asset, indicates that the effectiveness of the BIFFEX contract as a centre for risk management and price discovery has strengthened over the recent years as a result of the more homogeneous composition of the index. This by itself indicates that the forthcoming elimination from the underlying index of the cargo routes for larger vessels, which will take place in November 1999, may have a beneficial impact on the market.
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