Modeling and Prediction of the Volatility of the Freight Rate in the Roadway Freight Market of China

Abstract

The trucking sector is an essential part of the logistic system in China, carrying more than 80% of its goods. The complexity of the trucking market leads to tremendous uncertainty in the market volatility. Hence, in this highly competitive and vital market, trend forecasting is extremely difficult owing to the volatility of the freight rate. Consequently, there is interest in accurately forecasting the freight volatility for truck transportation. In this study, to represent the degree of variation of a freight rate series in the trucking sector over time, we first introduce truck rate volatility (TRV). This investigation utilizes the generalized autoregressive conditional heteroskedasticity (GARCH) family of methods to estimate the dynamic time-varying TRV using the real trucking industry transaction data obtained from an online freight exchange (OFEX) platform. It explores the ability of forecasting with and without reestimation at each step of the conventional GARCH models, a neural network exponential GARCH (NN-EGARCH) model, and a traditional forecasting technique, the autoregressive integrated moving average (ARIMA) approach. The empirical results from the southwest China trucking data indicate that the asymmetric GARCH-type models capture the characteristics of the TRV better than those with Gaussian distributions and that the leverage effects are observed in the TRV. Furthermore, the NN-EGARCH performs better in in-sample forecasting than other methods, whereas ARIMA performs similarly in out-of-sample TRV forecasting with reestimation. However, the Diebold–Mariano test indicates the better forecasting ability of ARIMA than the NN-EGARCH in the out-of-sample periods. The findings of this study can benefit truckers and shippers to capture the tendency change of the market to conduct their business plan, increase their look-to-buy rate, and avoid market risk.