Economic significance of market timing rules in the Forward Freight Agreement markets

Quantitative market timing strategies have been traditionally tested in liquid commodity and financial futures, often with mixed results with respect to their performance. We extend this methodology to a non-storable commodity, freight, where hitherto this analysis has not been carried out. The freight futures market is mature and increasingly liquid, making it a good case for diversification and trading opportunities. We carry out a comprehensive study of quantitative trading strategies in the FFA (Forward Freight Agreements) market on a wide variety of contracts and maturities with a number of trading rules. We find that in spite of robustness checks, trading rules do outperform the buy-and-hold benchmark in general. We also explore the possibility that illiquidity and a small sample size may impact the results of the tests and therefore offer an intuitive approach to mitigate their effects. A procedure that augments the Hansen (2005) SPA (Superior Predictive Ability) methodology and allows us to use it for smaller sample sizes with increased confidence is also proposed.

► We test 11,548 market timing strategies in the Forward Freight Agreements (FFAs) market.
► Data snooping bias was mitigated using the Superior Predictive Ability (SPA) test.
► We propose an augmentation for the SPA test to allow for small sample bias.
► We find that after robustness checks, trading rules do outperform the benchmark.
► This concurs with the adaptive market hypothesis: inefficiencies exist in younger markets.