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Title: The formation of FFA rates in dry bulk shipping: Spot rates, risk premia, and heterogeneous expectations Authors:  Ioannis Moutzouris - Cass Business School (United Kingdom) [presenting]
Nikos Nomikos - Cass Business School (United Kingdom)
Abstract: The formation of FFA rates in the dry bulk shipping industry is examined. We illustrate that the bulk of volatility in the FFA basis can be attributed to expectations about future physical market conditions rather than expectations about future risk premia, as is commonly suggested in the commodity markets literature. Despite this finding, though, there appears to be a bias in FFA rates in the form of both a strong momentum effect and significant predictability of risk premia by lagged price-based signals and economic variables that reflect recent changes in the physical market conditions. We further contribute to the literature by developing an asset pricing framework that can explain both the existence of momentum and the documented sort of predictability of future risk premia. The distinct feature of our framework is that, apart from having as is standard in the literature different objective functions, agents might also differ in the way they form expectations about future market conditions. Accordingly, we illustrate formally that, to simultaneously match the observed empirical regularities, one must depart from the rational expectations benchmark of the model. To the best of our knowledge, the FFA market had never been examined from the perspective of a structural, behavioural economic model before.