Measuring bulk shipping prices risk

摘要

In this paper, we study the risk management implications of different assumptions about the stationarity of freight rates. Specifically, we compare freight rate volatility estimations derived from two different two-factor models; a stationary and a non-stationary one. Based on these volatility estimations, we provide a simple method for estimating the value at risk, VaR, for a single route. The results indicate that when using the non-stationary model, risk managers may overestimate risk, since VaR estimations grow monotonically over time, whereas when using the stationary model, they may underestimate the risk, because VaR estimations are bounded. We also provide estimations of the freight rates option prices based on these two models. Option prices tend to be higher when using the non-stationary model. Finally, we provide a Monte-Carlo simulation method for jointly estimating the VaRs for two routes based on a two-factor model with a common long-term trend, which allows risk managers to take advantage of the benefits of diversification.