Measuring risk spillover effects on dry bulk shipping market: a value-at-risk approach

ABSTRACT

This paper adopts a simple but valid value-at-risk (VaR) approach to measuring the risk in the dry bulk shipping market by means of Baltic Dry Index (BDI). To have a better understanding of the risk in the dry bulk shipping market, this paper uses the stock market and the crude oil market as two reference markets. Available rich datasets enable a non-parametric historical simulation experiment on the risk in the dry bulk shipping market. The bellwether phenomenon in the dry bulk shipping market is explored both qualitatively and quantitatively. The experiment indicates that the dry bulk shipping market becomes the riskiest one among the aforementioned markets after the Subprime Mortgage Crisis that started in the USA in the early 2008. Furthermore, this paper identifies the information transmission mechanisms between the dry bulk shipping market and the reference markets by employing a multivariate quantile model and an impulse-response method, and explores and compares risk spillover effects of the global stock market and the crude oil market on the dry bulk shipping market before and after the financial crisis. Results reveal that spillover effects between the referred markets change after the Subprime Mortgage Crisis in terms of intensity.

KEYWORDS:

• Dry bulk shipping market
• risk spillover effects
• VAR for VaR
• impulse-response functions
• the Subprime Mortgage Crisis

Acknowledgments

The authors would like to thank the editors and two anonymous reviewers for their useful comments on the earlier versions of this paper. This work was supported in part by the National Science Foundation of China (Grant No.: 71671110 and No: 71601112). The authors are also grateful for the support of the Lloyd’s Register Foundation, a charity that helps to protect life and property by supporting engineering-related education, public engagement, and the application of research, via Grant#: G\100111.

Disclosure statement

No potential conflict of interest was reported by the authors.

Statement

This article is a revised and expanded version of a paper entitled ‘Measuring risks in dry bulk shipping market: A VaR for VAR approach’ presented at 2019 World Transport Convention, Beijing, China; 13-16 June 2019.

Notes

1. The Baltic Dry Index (BDI), is reported daily by the London-based Baltic Exchange, and is a weighted average of the Capesize, Panamax and Supramax time-charter rates.

2. The source for BDI is Clarksons Research—Timeseries & Graphs—Bulkers -Bulkers General—Earnings & Freight—Baltic Indices. https://sin.clarksons.net/Timeserie, consulted March 4 2019.

3. The source for S&P500 and Dow30 is https://finance.yahoo.com/quote/%5EGSPC?p=^GSPC

4. The source for WTI futures and Brent futures is https://www.investing.com/commodities/,consulted 23 April 2019.

5. Markets are closed on different days, this paper repairs data based on BDI, that reproduces statistics of the day before if the market is closed but BDI is still reporting, and deletes extra data if BDI is not published on that day.

6. The results of the confidence levels of 95% and 90% could be found in appendix.

Additional information

Funding

This work was supported by the National Science Foundation of China [Grant No. 71671110 and 71601112] and the Lloyd’s Register Foundation [Grant No. G\100111].