Abstract
Shipping, although a crucial component of the transportation of commodities worldwide, is hardly present in the finance literature at this point. The first and foremost goal of this article is to describe and explain from an economic perspective the key features of shipping markets; the second one is to analyze the behavior of freight rates, which define the final cost of an imported commodity. The authors focus on the major index, the BDI (Baltic Dry Index), and propose some diffusion models able to capture the unique features of its trajectories, namely large swings and continuity. Their performance is exhibited on a database covering the period 1988–2010. Such spot models should facilitate the growth of the market of freight rates options, a safe hedging instrument for farmers and cooperatives that ship their grains to distant destinations. <b>TOPICS:</b>Commodities, mutual funds/passive investing/indexing, global, performance measurement
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