Amir H. Alizadeh

The price-volume relationship in the sale and purchase market for dry bulk vessels

This paper investigates, for the first time, the relationship between prices and trading activity in a market where real assets are traded, i.e. in the sale and purchase market for second-hand dry bulk vessels. Investigation of this issue is of interest since the level of trading activity may contain information about the sentiment and the future direction of the prices in the market. Several important conclusions emerge from this analysis. It is found that price changes are useful in predicting trading volume, which suggests that higher capital gains encourage more transactions in the market. Additionally, it seems that volume has a negative impact on the volatility of price changes. More specifically, in contrast to what is reported for financial markets, we find evidence that, in the market for ships, increases in trading activity lead to a reduction in market volatility. This can be explained by the unique underlying characteristics of the market for ships, including thin trading, which imply that increases in trading activity result in price transparency and stability. These findings indicate that practitioners in the market may use the information contained in the level of trading activity so as to guide their market decisions in the sale and purchase market.

Trading strategies in the market for tankers

This paper introduces a new approach in timing the sale and purchase of ships in the tanker market and examines the performance of this trading strategy over the period January 1976 to September 2004. Based on the long-run cointegration relationship between earnings and price, we establish a trading model which can be used as an indicator of investment or divestment timing decisions. We also perform statistical tests using the bootstrap approach in order to discount the possibility of data snooping biases and test the robustness of our trading models. Our results indicate that trading strategies based on earning-price ratios significantly out-perform buy and hold strategies in the tanker market.

Hedging against bunker price fluctuations using petroleum futures contracts: constant versus time-varying hedge ratios

The effectiveness of hedging marine bunker price fluctuations in Rotterdam, Singapore and Houston is examined using different crude oil and petroleum future contracts traded at the New York Mercantile Exchange (NYMEX) and the International Petroleum Exchange (IPE) in London. Using both constant and dynamic hedge ratios, it is found that in and out-of-sample hedging effectiveness is different across regional bunker markets. The most effective futures instruments for out of sample hedging of spot bunker prices in Rotterdam and Singapore are the IPE crude oil futures, while for Houston it is the gas oil futures. Differences in hedging effectiveness across regional markets are attributed to the varying regional supply and demand factors in each market. In comparison to other markets, the cross-market hedging effectiveness investigated in the bunker market is low.

The efficiency of the forward bunker market

The aim of this paper is to investigate the pricing efficiency of the forward bunker markets in different geographical locations and across different maturities. Following the recent growth in the use of bunker fuel derivatives for risk management in the shipping industry, it is interesting to investigate whether these instruments serve the needs of market participants. Forward bunker contracts are available for all the major ports of the world on an over-the-counter basis, although the most liquid contracts are for delivery in New York, US Gulf, Singapore and Rotterdam. In order to test the validity of the efficient market hypothesis in the formation of forward bunker prices, we employ a battery of statistical tests. The results from these tests over different maturities indicate conclusively that the forward bunker market is efficient and hence market participants receive accurate signals from forward bunker prices which they can use as a guidance in their activities in the physical market.

An Investigation into the Effect of Risk Management on the Profitability of Shipping Investment and Operations

In this paper the authors consider the risks associated with shipping investment and operations, as well as how those risks can be managed. The magnitude of the risks associated with investing in shipping are highlighted, while simultaneously asserting that while risks are high, potential returns are, as well. Although risk management in shipping has traditionally been viewed as an activity which undermines profit-making potential, recent increases in the level of freight rates, as evidenced in the growth of traded volumes of freight derivatives, coupled with the exceptionally high degree of volatility in the bulk markets in particular, have changed the way that investors in shipping markets view risk and uncertainty, as well as how they deal with it. The authors analyse the return, risk and utility performance of two different investment strategies in the tanker and dry bulk shipping sectors, using a data set of ship prices and spot- and time-charter earnings. The suggestion that a freight-rate risk management strategy can improve the overall risk-return profile of shipping investment projects is shown by the results. And for larger vessels in both the sectors analysed, interestingly, hedging strategies prove to be more effective for investment.

Performance of statistical arbitrage in petroleum futures markets

This paper investigates the intermarket and intercommodity linkages of petroleum and petroleum product futures markets and proposes trading strategies based on the combination of fundamental and technical analyses. These trading strategies use the cointegration between futures prices as fundamental relationships and implement technical trading rules to determine timing of long-short positions. The robustness of the trading strategies is also tested using the stationary bootstrap approach. Our results indicate that expected market prices in the relative form (spreads) incorporate inefficiencies, which can be translated to abnormal profits through appropriate trading strategies even when high levels of transaction costs (bid-ask spreads) are considered.

Stock Market Returns and Shipping Freight Market Information: Yet Another Puzzle!

Changes in shipping freight rates predict stock market returns. In today’s global world, where economies are linked through international trade, shipping freight rates carry information about economic activity which is reflected in stock returns. Our results are statistically and economically significant and cannot be explained by time-varying risk premia as shipping freight rate changes significantly predict negative excess returns. Consistent with the delayed reaction hypothesis, it seems that investors are slow in responding to the information on changes in shipping freight rates. Moreover, results are robust across world and international stock indexes.

Dynamics of the Forward Curve and Volatility of Energy Futures Prices

The shapes of forward curves of energy commodities are believed to contain information on the volatility of futures prices for these commodities. The slope of the forward curve not only reflects temporal supply and demand conditions, but also the relationship between current and expected market conditions. However, no empirical investigation exists in the literature on whether utilising information on the slopes of the forward curves of energy commodities can improve one’s ability to capture the dynamics of the volatility of the futures prices of these commodities. The aim of this study is to undertake such an investigation. Daily energy futures prices traded on the New York Mercantile Exchange (NYMEX) over the period January 1997 to December 2006 are used to estimate the parameters of an augmented transition EGARCH model that allows for changes in the model’s parameters based on the forward curve. The forecasting performance of the model is compared to that of other models in predicting the volatility of energy futures prices over the period January 2007 to December 2008. The results provide strong support in favour of a convex relationship between the volatility of energy futures prices and the forward curve.

Forward Freight Agreements

From the early 1990s a new market for trading the forward value of freight emerged, primarily as a response to the needs of market players who were aware of the deficiencies of the BIFFEX contract as a hedging instrument. These players wanted a hedging tool which would provide a more precise match to their exposure in the physical market and, hence, a more accurate hedging mechanism. Since the first recorded trade of a forward freight agreement (FFA) in 1992, the market has grown at almost an exponential rate and, according to market sources, in February 2008 the total value of trades in the market was worth US

Introduction to Shipping Markets

125 billion, which represents a 150 per cent increase compared to 2007.1 In this chapter, therefore, we describe the structure and functioning of the FFA market, the trading practices, documentation and type of contract used in the trades, applications and uses of FFAs for risk management and speculation, as well as how to deal with issues such as settlement risk and basis risk.