Forecasting spot freight rates based on forward freight agreement and time charter contract

In this article, the lead--lag relationship in freight rates between spot and forward markets and between spot and time charter (TC) markets was investigated. A hybrid forecasting method for spot freight rates was proposed based on the price discovery functions of the freight forward agreement (FFA) and the TC contract. VECM-based models were developed to analyse the relation between spot rates and FFA and TC rates. Empirical results indicate that cointegration does exist between spot and FFA rates and between spot and TC rates. Furthermore, while both FFA and TC rates are helpful in forecasting spot freight rates, the integration of the two can further improve the forecasting performance of spot freight rates.