Skip to main content
SpringerLink
Log in

The Unbiasedness Hypothesis in the Freight Forward Market: Evidence from Cointegration Tests

  • Published:
Review of Derivatives Research Aims and scope Submit manuscript

Abstract

The current paper investigates the unbiasedness hypothesis of Forward Freight Agreement (FFA) prices in the freight over-the-counter (OTC) forward market trades. Cointegration techniques are employed to examine the hypothesis. The results indicate that: FFA prices one and two months before maturity are unbiased predictors of the realised spot freight rates for all investigated shipping routes; three months FFA prices for panamax Pacific routes are unbiased predictors of spot prices, while FFA prices for panamax Atlantic routes are found to be biased predictors of spot prices. This diverse evidence suggests that the validity of the unbiasedness hypothesis depends on the specific characteristics of the market under investigation, the selected trading route and the time to maturity of the contract.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Akaike, H. (1973). “Information Theory and an Extension of the Maximum Likelihood Principle.” In B. Petrov and F. Csake (eds.), 2nd International Symposium on Information Theory, Budapest: Akademiai Kiado.

    Google Scholar 

  • Barnhart, S.W., R. McNown, and M.S. Wallace. (1999). “Non-Informative Tests of the Unbiased Forward Exchange Rate,” Journal of Financial and Quantitative Analysis 34(2), 265–291.

    Google Scholar 

  • Barnhart, S.W. and A.C. Szakmary. (1991). “Testing the Unbiased Forward Rate Hypothesis: Evidence on Unit Roots, Cointegration, and Stochastic Coefficients,” Journal of Financial and Quantitative Analysis 26(2), 245–267.

    Google Scholar 

  • Bera, A.K. and C.M. Jarque. (1981). “An Efficient Large-Sample Test for Normality of Observations and Regression Residuals,” Working Papers in Econometrics, Vol. 40, Australian National University, Canberra.

  • Bessembinder, H. and M.L. Lemmon. (2002). “Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets,” Journal of Finance 57, 1347–1382.

    Google Scholar 

  • Bierens, H.J. (1997). “Nonparametric Cointegration Analysis,” Journal of Econometrics 77, 379–404.

    Google Scholar 

  • Brenner, R. and K. Kroner. (1995). “Arbitrage, Cointegration and Testing the Unbiasedness Hypothesis in Financial Markets,” Journal of Financial and Quantitative Analysis 30, 23–42.

    Google Scholar 

  • Calvet, L., M. Gonzalez-Eiras, and P. Sodini. (2004). “Financial Innovation, Market Participation and Asset Prices,” Journal of Financial and Quantitative Analysis 39(3), September.

  • Chowdhury, A. (1991). “Futures Market Efficiency: Evidence from Cointegration Tests,” Journal of Futures Markets 11, 577–589.

    Google Scholar 

  • Dickey, D. and W. Fuller. (1981). “Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root,” Econometrica 49, 1057–1072.

    Google Scholar 

  • Diebold, F.X., J. Gardeazabal, and K. Yilmaz. (1994). “On Cointegration and Exchange Rate Dynamics,” Journal of Finance 49, 727–735.

    Google Scholar 

  • Engel, C. (1996). “The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence,” Journal of Empirical Finance 3, 123–192.

    Google Scholar 

  • Engle, R.F. (1982). “Autoregressive Conditional Heteroskedasticity with Estimates of the Variance of United Kingdom Inflation,” Econometrica 50, 987–1008.

    Google Scholar 

  • Engle, R.F. and C.W. Granger. (1987). “Cointegration and Error Correction: Representation, Estimation, and Testing,” Econometrica 55, 251–276.

    Google Scholar 

  • Evans, M.D.D. and K.K. Lewis. (1995). “Do Long–Term Swings in the Dollar Affect Estimates of the Risk Premia?” Review of Financial Studies 8, 709–742.

    Google Scholar 

  • Eydeland, A. and H. Geman. (1998). “Pricing Power Derivatives,” Risk 11(October), 71–74.

    Google Scholar 

  • Fama, E.F. (1970). “Efficient Capital Markets: A Review of Theory and Empirical Work,” Journal of Finance 25, 383–417.

    Google Scholar 

  • Geman, H. and O. Vasicek. (2001). “Plugging into Electricity,” Risk 14(August), 93–97.

    Google Scholar 

  • Granger, C.W.J. and P. Newbold. (1974). “Spurious Regressions in Econometrics,” Journal of Econometrics 2, 1045–1066.

    Google Scholar 

  • Hakkio, C.S. and M. Rush. (1989). “Market Efficiency and Cointegration: An Application to the Sterling and Deutschemark Exchange Rates,” Journal of International Money and Finance 8, 75–88.

    Google Scholar 

  • Hansen, L. and R. Hodrick. (1980). “Forward Exchange Rates as Optimal Predictors of Futures Spot Rates: An Econometric Analysis,” Journal of Political Economy 88, 829–853.

    Google Scholar 

  • Johansen, S. (1988). “Statistical Analysis of Cointegration Vectors,” Journal of Economic Dynamics and Control 12, 231–254.

    Google Scholar 

  • Johansen, S. (1991). “Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models,” Econometrica 59, 1551–1580.

    Google Scholar 

  • Johansen, S. and K. Juselius. (1990). “Maximum Likelihood Estimation and Inference on Cointegration—with Applications to the Demand for Money,” Oxford Bulletin of Economics and Statistics 52, 169–211.

    Google Scholar 

  • Kavussanos, M.G. (1996). “Comparisons of Volatility in the Dry-Cargo Ship Sector: Spot Versus Time-Charters, and Small Versus Larger Vessels,” Journal of Transport Economics and Policy, January, 67–82.

  • Kavussanos, M.G. (2002). “Business Risk Measurement and Management in the Cargo Carrying Sector of the Shipping Industry.” In The Handbook of Maritime Economics and Business, Chapter 30. London: Lloyds of London Press, pp. 661–692.

    Google Scholar 

  • Kavussanos, M.G. and I.D. Visvikis. (2004). “Market Interactions in Returns and Volatilities between Spot and Forward Shipping Freight Markets,” Journal of Banking and Finance 28, 2015–2049.

    Google Scholar 

  • Kolb, R. (2000). Futures, Options & Swaps, 3rd ed. London: UK, Blackwell Business Publishers.

    Google Scholar 

  • Krehbiel, T. and L. Adkins. (1993). “Cointegration Tests of the Unbiased Expectations Hypothesis in Metals Markets,” Journal of Futures Markets 13(7), 753–763.

    Google Scholar 

  • Kwiatkowski, D.P., C.B. Phillips, P. Schmidt, and Y. Shin. (1992). “Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We that Economic Time Series Have a Unit Root?” Journal of Econometrics 54, 159–178.

    Google Scholar 

  • Lee, C.I., K.C. Gleason, and I. Mathur. (2000). “Efficiency Tests in the French Derivatives Market,” Journal of Banking and Finance 24, 787–807.

    Google Scholar 

  • Leuthold, R.M. (1979). “An Analysis of the Futures-Cash Price Basis for Live Beef Cattle,” North Central Journal of Agricultural Economics 1, 47–52.

    Google Scholar 

  • Luintel, K.B. and K. Paudyal. (1998). “Common Stochastic Trends between Forward and Spot Exchange Rates,” Journal of International Money and Finance 17, 279–297.

    Google Scholar 

  • MacKinlay, C. and K. Ramaswamy. (1988). “Index-Futures Arbitrage and the Behavior of Stock Index Futures Prices,” Review of Financial Studies 1, 159–172.

    Google Scholar 

  • MacKinnon, J.G. (1991). “Critical Values for Cointegration Tests.” In R. Engle and C. Granger (eds.), Long-Run Economic Relationships. Oxford University, pp. 267–276.

  • Moore, M.J. and Cullen. (1995). “Speculative Efficiency on the London Metal Exchange,” The Manchester School 63, 235–256.

    Google Scholar 

  • Naik, G. and R.M. Leuthold. (1988). “Cash and Futures Price Relationships for Non-Storable Commodities: An Empirical Analysis Using a General Theory,” Western Journal of Agricultural Economics 13, 327–338.

    Google Scholar 

  • Norrbin, S.C. and K.L. Reffett. (1996). “Exogeneity and Forward Rate Unbiasedness,” Journal of International Money and Finance 15(2), 267–274.

    Google Scholar 

  • Osterwald-Lenum, M. (1992). “A Note with the Quantiles of the Asymptotic Distribution of the ML Cointegration Rank Test Statistics,” Oxford Bulletin of Economics and Statistics 54, 461–472.

    Google Scholar 

  • Phillips, P.C.B. and B. Hansen. (1990). “Statistical Inference in Instrumental Variables Regression with I(1) Processes,” Review of Economic Studies 57, 99–125.

    Google Scholar 

  • Phillips, P.C.B. and P. Perron. (1988). “Testing for a Unit Root in Time Series Regressions,” Biometrica 75, 335–346.

    Google Scholar 

  • Reimers, H. (1992). “Comparisons of Tests for Multivariate Cointegration,” Statistical Papers 33, 335–359.

    Google Scholar 

  • Samuelson, P.A. (1965). “Proof that Properly Anticipated Prices Fluctuate Randomly,” Industrial Management Review 6, 41–49.

    Google Scholar 

  • Schwartz, G. (1978). “Estimating the Dimension of a Model,” Annals of Statistics 6, 461–464.

    Google Scholar 

  • Stein, J.L. (1981). “The Simultaneous Determination of Spot and Futures Prices,” American Economic Review 51(5), 1012–1025.

    Google Scholar 

  • Vasicek, O. (1977). “An Equilibrium Characterization of the Term Structure,” Journal of Financial Economics 5, 177–188.

    Google Scholar 

  • Working, H. (1970). “Economic Functions of Futures Markets.” In H. Bakken (ed.), Futures Trading in Live-Stock—Origins and Concepts. Chicago: Chicago Mercantile Exchange.

    Google Scholar 

  • Yang, J. and D.J. Leatham. (1999). “Price Discovery in Wheat Futures Markets,” Journal of Agricultural and Applied Economics 31, 359–370.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Athens University of Economics and Business, 76 Patission St, TK 104 34, Athens, Greece

    Manolis G. Kavussanos

  2. University of Piraeus, Department of Maritime Studies, 80 Karaoli & Dimitriou St, 185 34, Piraeus, Greece

    Ilias D. Visvikis

  3. Cass Business School, City University, 106 Bunhill Row, EC1Y 8TZ, London, UK

    David Menachof

Authors
  1. Manolis G. Kavussanos
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Ilias D. Visvikis
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. David Menachof
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Manolis G. Kavussanos.

Additional information

JEL classification

G13, G14, C32

Rights and permissions

Reprints and permissions

About this article

Cite this article

Kavussanos, M.G., Visvikis, I.D. & Menachof, D. The Unbiasedness Hypothesis in the Freight Forward Market: Evidence from Cointegration Tests. Rev Deriv Res 7, 241–266 (2004). https://doi.org/10.1007/s11147-004-4811-7

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11147-004-4811-7

Keywords

Search

Navigation