Statistical arbitrage in the freight options market

ABSTRACT

We investigate whether there are consistent misspecifications of volatility in the freight options markets that can be exploited in profitable trading strategies. We derive smooth forward freight rate curves from observed market prices and convert these to term structures of historical volatility for the Capesize, Panamax and Supramax segments of the drybulk shipping market. The differences between the historical and implied volatility term structures form the basis for executing option trading strategies. We find that there exist statistical arbitrage profits in the freight option markets, suggesting a degree of market inefficiency.

KEYWORDS:

• Freight options
• forward freight agreements
• dry bulk
• volatility term structure
• volatility trading

Acknowledgments

This study formed part of the thesis of co-authors Ånestad and Abrahamsen for the degree of MSc in Economics and Business Administration at the Norwegian School of Economics, which has been further developed and revised after the completion of their thesis.

Notes

1. Alternative indices produced by price reporting agency S&P Global Platts exist but are currently not used by market participants.

2. Note that CURMON refers to the contract for the current month, +1MON to the subsequent monthly maturity, +1Q to the nearest quarterly maturity, +2Q to the next quarterly maturity, and so on.