Long memory and asymmetric time varying spillover effects in dry bulk freight markets
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Long memory and asymmetric time varying spillover effects in dry bulk freight markets Sang-Kuck Chunga and Jong-Ha Weonb a
Department of Economics and Center for Research on Northeast Asian Economy, Inje University, Obang-dong 607, Kimhae, Kyungnam 621-749, Korea. E-mail: [email protected] b Department of International Trade, Inje University, Kimhae City, Kyungnam 621-749, Korea. E-mail: [email protected]
Abstract
This study employs two versions of bivariate asymmetric mixed normal GARCH models to capture the skewness and kurtosis detected in both the conditional and unconditional return distributions of dry bulk freight rates. The empirical results, incorporating the long memory effect on the returns, not only provide better descriptions of the dynamic behaviors of the freight market prices, but also play a significant role in improving the understandings of return dynamics. In addition, mixed normal models for time-varying volatility provide a better fit to the conditional densities than the usual GARCH specification and have the important advantage that the conditional higher moments are time-varying. This implies that the volatility skews implied by mixed normal models are more likely to exhibit the features of risk and that the direction of the information flow is regime-dependent. The findings of this study contain useful information for such diverse purposes as vessel allocation, portfolio management and risk management.
Maritime Economics & Logistics (2013) 15, 494–522. doi:10.1057/mel.2013.13
Keywords: dry bulk freight markets; long memory process; asymmetries; regimedependent spillovers; bivariate mixed normal DCC GARCH model
Introduction The dry bulk freight market primarily concerns the transportation of dry bulk goods, including the five major bulks of iron ore, coal, grain, bauxite and phosphate rock as well as other minor bulks such as steel products, sugar and © 2013 Macmillan Publishers Ltd. 1479-2931 Maritime Economics & Logistics Vol. 15, 4, 494–522 www.palgrave-journals.com/mel/
Long memory and asymmetries in dry bulk freight markets
fertilizer. These commodities are vital to various industries and human life. However, the freight market is complex, and market participants, including shipowners, operators and charterers, face significant price risk. Freight rates may fluctuate owing to information on vessel supply, changes in industryspecific demand in the long run and short-run changes in oil prices. Spillover effects between freight markets, for example between the Capesize and Panamax ones, may arise when information transmission between these markets is neither instantaneous nor complete. Consider the impact on freight rates, in either the Capesize or Panamax markets, resulting from the release of macroeconomic news that produces an unexpected decline in freight rates in the other market. This may result in a corresponding decline in freight rates in one market if it signals that demand in one market will be lower than the other in the future. A cointegration test may be used to statistica
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