Study on volatility and leverage effect in bunker markets

Abstract

This research primarily focuses on analyzing the volatility and to study the leverage effect in the bunker prices specifically in IFO 380 AND IFO 180. To achieve this objective the research has used econometric model to study volatility known as ‘Exponential General Autoregressive Conditional Hetroskedasticity (E-GARCH). The time period chosen to analyze this data was from January 2000 to October 2015. The second objective in the research deals with investigating the impact or causal relationship of IFO 380 bunker grade on bunker grade 180 and vice-versa. In order to achieve this Bivariate analysis was done. The motivation behind this research was to study the leverage effect present in E- GARCH and based on results analyze where to risk mitigating strategies (hedging strategies). Also this research included aspects (problems and its corrections) of serial correlation seen through LM tests and heteroskedastic problems in the Bunker price data which affects the results. The literature showed different research which dealt with volatility and GARCH models but with tabulation of all the literature a common research gap was found that there are limited studies on Bunker prices (especially dealing with IFO 380 and IFO 180) using E-GARCH and Bivariate analysis. The results were obtained through E-Views software. The software exhibited the model to be highly significant at 1% level of significance. The IFO 380 and IFO 180 were observed to have short and long run shocks and additionally a positive leverage effect was seen in IFO 180. Also a strong and apositive impacts were observed between IFO 380 and IFO 180 prices. Based on these results and studying the volatility the recommendations were presented.