Forecasting and Hedging in the Ship Recycling Market

Abstract

This study examines the accuracy and hedge effectiveness of different static models to forecast and hedge ship demolition prices. Nine international forecasting variables and six futures contracts relevant in the ship demolition market are used in a Vector Error Correction Model, Error Correction Model, and Auto Regressive Moving Average model to perform this analysis. Out of sample results for the ECM using the Chinese iron ore index had the most accurate out of sample forecast accuracy. All models had low hedge effectiveness. Based on the study, regional variables and dynamic models are recommended for improved forecasting and hedging models which would address basis risk between spot and futures prices and changing correlation between variables over time.