Measuring the dynamic term structure of the FFA market

ABSTRACT

Forward Freight Agreements (FFAs) are exchange-traded futures and the main means of risk management for shipping spot freight. The relationship between the FFA market and the shipping spot market has attracted much attention, but few studies focus on the dynamic FFA term structure and its correlation with the spot price. In this study, we establish the dynamic term structure of the FFA market by quantifying the level factor, the slope factor and the curvature factor of the FFA term structure to reveal the underlying information in the shipping derivatives market, and further scrutinize the impact of the FFA term-structure factors on the shipping spot market. The empirical results indicate that the term-structure factors have significant time-varying effects on the BDI and BPI: The effect of the term-structure factors on BDI and BPI changes with shipping market conditions and economic environment. The level factor has a positive effect, while the slope factor and the curvature factor both have negative effects, with the impacts on the BPI being about twice as large as the impacts on the BDI. The three factors all have their strongest effect in the short term and the weakest effect in the long term.

KEYWORDS:

• Forward freight agreement
• shipping market
• dynamic term structure
• Nelson-Siegel model

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by the National Natural Science Foundation of China (Grant No. 71831002, 72174035, 72072018, 71971034), the 111 Project of China (Grant No. B20082), Postdoctoral Research Foundation of China (Grant No. 2021T140081), Humanities and Social Science Fund of Ministry of Education of China (Grant No. 19YJC790171, 21YJCZH107), Fundamental Research Funds of the Educational Department of Liaoning Province (Grant No. LJKZZ20220126), Social Science Foundation of Liaoning Province (Grant No. L22BJY024), and Fundamental Research Funds for the Central Universities of China (Grant No. 3132023286, 3132023283).