Historical distribution, volatility and value-at-risk in the tanker shipping market

Abstract

The shipping market is characterised as a risky market, which makes it even more important to get a deeper understanding of the risks and its dynamics. We have examined freight rates for the five most popular tanker routes, using price data for January 2004 to January 2012. The historical distributions reveal fat tails and high peaks for all freight rates when compared to a Gaussian distribution and the right tails appear to be heavier than the left tails. Indicating higher historical tail risk for producers compared with shipowners. The volatility analysis reveals stochastic volatility and high volatility levels. The dirty routes appear more volatile than the clean routes, which also are supported by the Value-at-Risk results. The VaR results show considerable fright rate risk for all the routes and also indicate that the distribution of the returns and the volatility should be carefully considered when choosing VaR method.