Abstract: The Forward Freight Agreement (FFA) is an important derivative for hedging risks in the shipping market. This paper conducts an empirical research on the convenience yield in the shipping market, utilizing four types of FFAs within the dry bulk shipping market as case studies. Firstly, this paper constructs a two-factor stochastic model of the shipping market, including random freight rates and random convenience yields. Empirical results show that there are convenience yields in the shipping market, and they are strongly correlated with spot freight rates. Secondly, this paper examines the term structure of the four types of FFAs. Empirical results indicate that the stochastic variation in convenience yields is a major parameter in forming the term structure of FFAs. Finally, this paper investigates the predictive role of convenience yields on spot freight rates. The empirical findings indicate that the first-order difference in convenience yields, reflecting market expectations, serves as a significant predictor of spot freight rates. The convenience yield in the shipping market is of great significance for studying price formation, FFA term structure characteristics, and cross-market effects between bulk commodities and shipping.

Key words: forward freight agreement, term structure, convenience yield, shipping market, market forecast