Title: Forecasting volatility of tanker freight rates based on asymmetric regime-switching GARCH models

Authors: Philipp Lauenstein; Thomas Walther

Addresses: Department of Economics, Helmut-Schmidt-University, Hamburg, Germany; Department of Applied Economics, HSBA Hamburg School of Business Administration, Hamburg, Germany ' Faculty of Business and Economics, Technische Universität Dresden, Dresden, Germany; School of Business, International University, Vietnam National University of Ho Chi Minh City, Ho Chi Minh City, Vietnam

Abstract: This paper investigates the performance of various conditional volatility models to forecast the second moment of tanker freight rates. Justified by existing theoretical and empirical evidence, we focus on asymmetric Markov regime-switching models to study the major global routes for long-haul trade of crude oil during the sample period from June 2000 to May 2015. Moreover, in contrast to a number of existing studies, we examine seasonally adjusted freight rates. We find that regime-switching GARCH models outperform their single-regime complements in terms of in-sample fit and out-of-sample forecasting accuracy. In particular, the asymmetric MRS-EGARCH and MRS-APARCH exhibit superior in- and out-of-sample performance. To additionally examine the applicability in freight risk management, we compare Value-at-Risk and Expected Shortfall forecasts. Our results show that accounting for volatility regimes and asymmetry does not enhance the performance of one-day-ahead forecasts of either risk measure for both long and short trading positions.

Keywords: APARCH; asymmetric volatility; EGARCH; expected shortfall; GARCH models; Markov regime switching; risk management; seasonal adjustment; tanker freight rates; value-at-risk; VAR; volatility forecasting; crude oil transport.

DOI: 10.1504/IJFERM.2016.082978

International Journal of Financial Engineering and Risk Management, 2016 Vol.2 No.3, pp.172 - 199

Received: 23 Mar 2016
Accepted: 04 Jul 2016

Published online: 17 Mar 2017 *

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