The price discovery properties of clean tanker freight futures : unbiasedness, causality and forecasting

2010

The scope of this thesis is to examine the price discovery properties of clean tanker freight

futures. This is conducted by testing the unbiasedness hypothesis, the lead-lag relationship

between freight futures and spot rates and the forecasting properties of freight futures with

regards to the underlying spot rates. The research focuses on the most liquid clean tanker freight

futures, which are those written on the routes TC2, TC4 and TC5. The results indicate that

unbiasedness depends on the route in question and time to maturity. For a one-month horizon of

TC2 and one-, two- and three-month horizons of TC5, the unbiasedness hypothesis is found to

hold. Unbiasedness is also indicated for the two- and three-month horizons of TC2, but due to

weak evidence no conclusions are drawn. For TC4 the unbiasedness hypothesis is rejected. The

results from testing the lead-lag relationship indicate that futures prices lead spot rates for all the

routes, but the relationship is found to be bi-directional for TC4. When investigating the

forecasting performance of end-of-month freight futures it is found that univariate models

generally are outperformed by a random walk, indicating that forecasts should not be based on

historic spot prices alone. The multivariate models confirm this finding as they generally produce

more accurate forecasts than their univariate cousins. Multivariate time-series models were

generally found able to outperform forecasts indicated by outright futures prices for one- and

two-month horizons, but for a three-month horizon the futures performed as well as or better

than the multivariate models. These results imply that the investigated freight futures contain

valuable information about future spot rates. Problems regarding the stationarity of the series

were experienced throughout the thesis. Because of this it is recommended that the tests

performed in this thesis are repeated in a few years when more data is available.