Cointegration, unbiased expectations, and forecasting in the BIFFEX freight futures market

Abstract

The relationship between freight cash and futures prices is investigated using cointegration econometrics. Results illustrate that the BIFFEX futures market is unbiased, and hence efficient for the current, one, two, and quarterly contract horizons. Since the futures contract is based on an index of various shipping routes, which has undergone several changes since its inception, stability in the relationship between the spot and futures rates is investigated using rolling cointegration techniques. Results indicate that the futures contract appears to have become more efficient over time in predicting the spot rate, and that the decrease in trading volume found in the BIFFEX market is not driven by a lack of efficiency in this market. Rather, the decrease in futures trading might be attributed to the growth rate of the freight forward market. This article incorporates the long-run cointegrating relationships between cash and futures prices in a forecasting model and compares the forecasting performance of this model with several alternatives. It is found that while the futures price is the best predictor of future spot rates for the current-month contract, time-series models can outperform the futures contract at longer contract horizons. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:545–571, 2000.