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Shipping market models and the specification of freight rate processes

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  • Jostein Tvedt

    (Den norske Bank, Oslo, Norway; The Norwegian School of Economics and Business Administration, Bergen, Norway; DnB Markets, NO-0021, Oslo, Norway.)

Abstract

The paper tries to bridge the gap between traditional equilibrium shipping market models and the recent maritime asset pricing literature. Price processes that are generated by an equilibrium model with fairly standard supply and demand relations prove to be very close to popular mean reverting stochastic price processes that are used in the finance or real option literature. It is argued that rigidities in either the construction of new tonnage or yard capacity significantly contribute to the mean reverting property of freight rates. A stochastic optimal control problem is presented that includes the effect on freight rates of rigidities in yard capacity. The optimal investment and restructuring policies under switching costs are derived. The properties of the equilibrium freight rate process are close to that of a standard geometric mean reversion process. Maritime Economics & Logistics (2003) 5, 327–346. doi:10.1057/palgrave.mel.9100085

Suggested Citation

  • Jostein Tvedt, 2003. "Shipping market models and the specification of freight rate processes," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 5(4), pages 327-346, December.
    • Handle: RePEc:pal:marecl:v:5:y:2003:i:4:p:327-346
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    Citations

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    Cited by:

    1. Sel, Burakhan & Minner, Stefan, 2022. "A hedging policy for seaborne forward freight markets based on probabilistic forecasts," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 166(C).
    2. Magirou, Evangelos F. & Psaraftis, Harilaos N. & Bouritas, Theodore, 2015. "The economic speed of an oceangoing vessel in a dynamic setting," Transportation Research Part B: Methodological, Elsevier, vol. 76(C), pages 48-67.
    3. Sigbjørn Sødal & Steen Koekebakker & Roar Aadland, 2008. "Market switching in shipping — A real option model applied to the valuation of combination carriers," Review of Financial Economics, John Wiley & Sons, vol. 17(3), pages 183-203, August.
    4. Tvedt, Jostein & Hovi, Inger Beate, 2024. "Container shipping: A market equilibrium perspective on freight rates formation post-Covid-19," Transportation Research Part A: Policy and Practice, Elsevier, vol. 179(C).
    5. Sun, Xiaolei & Tang, Ling & Yang, Yuying & Wu, Dengsheng & Li, Jianping, 2014. "Identifying the dynamic relationship between tanker freight rates and oil prices: In the perspective of multiscale relevance," Economic Modelling, Elsevier, vol. 42(C), pages 287-295.
    6. Okan Duru, 2017. "The Origin and Consistency of the Ton–Mile Metric in the Shipping Economics," Logistics, MDPI, vol. 1(1), pages 1-8, February.
    7. Sødal, Sigbjørn & Koekebakker, Steen & Aadland, Roar, 2008. "Market switching in shipping -- A real option model applied to the valuation of combination carriers," Review of Financial Economics, Elsevier, vol. 17(3), pages 183-203, August.
    8. Adland, Roar & Cariou, Pierre & Wolff, Francois-Charles, 2016. "The influence of charterers and owners on bulk shipping freight rates," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 86(C), pages 69-82.
    9. Adland, Roar & Jia, Haiying & Lu, Jing, 2008. "Price dynamics in the market for Liquid Petroleum Gas transport," Energy Economics, Elsevier, vol. 30(3), pages 818-828, May.
    10. Fred Espen Benth & Steen Koekebakker, 2016. "Stochastic modeling of Supramax spot and forward freight rates," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 18(4), pages 391-413, December.
    11. Kou, Ying & Luo, Meifeng, 2018. "Market driven ship investment decision using the real option approach," Transportation Research Part A: Policy and Practice, Elsevier, vol. 118(C), pages 714-729.
    12. Tezuka, Koichiro & Ishii, Masahiro & Ishizaka, Motokazu, 2012. "An equilibrium price model of spot and forward shipping freight markets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 48(4), pages 730-742.
    13. Rau, Philipp & Spinler, Stefan, 2016. "Investment into container shipping capacity: A real options approach in oligopolistic competition," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 93(C), pages 130-147.
    14. Jason Dunn & Fernando Leibovici, 2023. "Navigating the Waves of Global Shipping: Drivers and Aggregate Implications," Working Papers 2023-002, Federal Reserve Bank of St. Louis, revised Aug 2024.
    15. Adland, Roar & Alizadeh, Amir H., 2018. "Explaining price differences between physical and derivative freight contracts," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 118(C), pages 20-33.
    16. Engelen, Steve & Norouzzadeh, Payam & Dullaert, Wout & Rahmani, Bahareh, 2011. "Multifractal features of spot rates in the Liquid Petroleum Gas shipping market," Energy Economics, Elsevier, vol. 33(1), pages 88-98, January.
    17. Siddiqui, Atiq W. & Basu, Rounaq, 2020. "An empirical analysis of relationships between cyclical components of oil price and tanker freight rates," Energy, Elsevier, vol. 200(C).
    18. Sercan Erol, 2017. "Calculation of the freight revenues in Turkey-focused maritime transportation," Maritime Policy & Management, Taylor & Francis Journals, vol. 44(7), pages 815-824, October.

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