Investigating volatility, connectedness and portfolio strategies between bulk shipping and commodity market: A DCC-GARCH R2 decomposed connectedness measure

Abstract

The bulk shipping sector is notably exposed to risks stemming from fluctuations in freight rates and the inherent volatility of commodity markets. Recent literature has extensively examined the asymmetric spillover connectivity between freight diversity and commodity markets; however, conventional methodologies cannot properly investigate return propagation dynamics. We apply the DCC-GARCH-based $R^2$ decomposed connectedness measure to investigate conditional volatility connectedness within the major dry bulk freight market, incorporating the natural gas and iron ore futures markets from February 24, 2014, to April 5, 2024. In addition, this study introduces the frameworks of multivariate hedging portfolios and minimum decomposed connectedness portfolio techniques. The empirical results indicate that dynamic total connectedness exhibits time-varying behavior and is significantly affected by major economic events. Additionally, the empirical results indicate that the round voyage freight market between China and Brazil functions as a net transmitter, while the transpacific round voyage freight market serves as a significant net receiver within the system. Finally, we find that the decomposed connectedness portfolio technique outperforms both the natural gas and iron ore markets compared to multivariate portfolio techniques based on hedging effectiveness. These findings enhance the understanding of interconnectedness across interregional freight markets and provide valuable insights for market participants and stakeholders to refine hedging strategies and mitigate risks based on market interdependencies.