Price Discovery, Causality and Forecasting in the Freight Futures Market

Authors: Kavussanos M.G.¹; Nomikos N.K.²

Source: Review of Derivatives Research, Volume 6, Number 3, 2003 , pp. 203-230(28)

Publisher: Springer

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Abstract:

This paper investigates the causal relationship between futures and spot prices in the freight futures market. Being a thinly traded market whose underlying asset is a service, sets it apart from other markets investigated so far in the literature. Causality tests, generalised impulse response analysis and forecasting performance evaluation indicate that futures prices tend to discover new information more rapidly than spot prices. Revisions in the composition of the underlying index to make it more homogeneous, have strengthened the price discovery role of futures prices. The information incorporated in futures prices, when formulated as a VECM, produces more accurate forecasts of spot prices than the VAR, ARIMA and random-walk models, over several steps ahead.

Keywords: futures markets; forecasting; Granger causality; generalised impulse response analysis; shipping

Document Type: Research article

Affiliations: 1: Athens University of Economics and Business, 76 Patission St, TK 104 34, Athens, Greece, Email: mkavus@aueb.gr 2: Cass Business School, 106 Bunhill Row, London EC1Y 8TZ, UK, Email: n.nomikos@city.ac.uk

Publication date: 2003-01-01