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Estimating risk‐neutral freight rate dynamics: A nonparametric approach
Author(s) -
GómezValle Lourdes,
Kyriakou Ioannis,
MartínezRodríguez Julia,
Nomikos Nikos K.
Publication year - 2021
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.22244
Subject(s) - unobservable , nonparametric statistics , econometrics , robustness (evolution) , parametric statistics , exchange rate , semiparametric model , economics , sample (material) , mathematics , computer science , statistics , chemistry , chromatography , gene , macroeconomics , biochemistry
We present a new method for estimating the unobservable drift of the risk‐neutral spot freight rate process from Forward Freight Agreements (FFA) prices in the absence of a closed‐form solution and demonstrate robustness via numerical simulations. Moreover, we conduct empirical experiments involving estimation of standard parametric models and a nonparametric model using Baltic Exchange data. We find that our nonparametric approach yields the lowest FFA pricing errors across maturities. Finally, we estimate the market price of risk, analyze its behavior in‐sample and out‐of‐sample and observe that, when estimated using our nonparametric approach, it evolves consistently with the indices under study.