Is the Forward Freight Market Efficient? A Study Investigating the Unbiasedness Hypothesis and Causality in the Shipping Market

Can Forward Freight Agreements be used to reduce the risk of freight rate fluctuations for market participants? Are FFA’s useful for hedging purposes? Will new information immediately be incorporated in FFA prices? To answer these questions it has to be investigated if FFA prices are unbiased predictors of later realized spot prices and hence markets can be considered as efficient. Due to a lack of data there exist very few studies investigating the efficient market hypothesis in the shipping market. I analysed data of the Baltic Panamax Index from 2005 to 2010. Residual based cointegration tests in combination with Johansen’s multivariate likelihood ratio approach are used. The strong result that all routes are cointegrated and unbiased is found. Therefore the hypothesis that the FFA market is efficient cannot be rejected for all investigated routes and maturities. This is a very important finding not only for theoretical purposes – but also for practical applications. FFA contracts are useful for hedging purposes and risk management strategies of companies. Additionally they contain information about the expected future direction of spot prices thus can guide companies in their investment decisions. An analysis of the causality showed that it runs stronger from the spot- to the forward price. This is intuitively plausible as a change of the forward price one- two- or three months in advance need not necessarily change the spot price today but a change (shock) in the spot rate should have effects on the forward rate too.