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Assessment of investment decision in the dry bulk shipping market based on real options thinking and the shipping cycle perspective

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  • Jingbo Yin
  • Yijie Wu
  • Linjun Lu

Abstract

As the dry bulk shipping market seems to have been stuck in a trough period for a long time, investors need to pay more attention to their investment strategies to survive during this period. This study aimed to find a suitable model to assess dry bulk ship investment decisions in the tough and peak periods based on real options theories. Two options, involving an abandonment option and a deferrable option, were used to define investors’ responses to the uncertainty in investment processes such as stopping or selling vessels. The option valuation was solved by using a binomial valuation model, due to data limitations. In accordance with shipping cycle theories, different volatility parameters for the tough and peak periods were calculated using a generalized autoregressive conditional heteroskedasticity (GARCH) model. The application of the real options model to a case study involving secondhand ship trading indicated its viability. According to the results of the case study, the new model has advantages over the traditional net present value (NPV) method in uncertain investment environments. Thus, the results demonstrate that the real options model is a more suitable method for use in the current dry bulk shipping market.

Suggested Citation

  • Jingbo Yin & Yijie Wu & Linjun Lu, 2019. "Assessment of investment decision in the dry bulk shipping market based on real options thinking and the shipping cycle perspective," Maritime Policy & Management, Taylor & Francis Journals, vol. 46(3), pages 330-343, April.
    • Handle: RePEc:taf:marpmg:v:46:y:2019:i:3:p:330-343
    DOI: 10.1080/03088839.2018.1520400
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    Cited by:

    1. Mingzhu Yu & Ruina Yang & Zelong Yi & Xuwen Cong, 2020. "Contracting in Ocean Shipping Market Under Asymmetric Information," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 37(02), pages 1-24, March.
    2. Mark Clintworth & Dimitrios Lyridis & Evangelos Boulougouris, 2023. "Financial risk assessment in shipping: a holistic machine learning based methodology," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 25(1), pages 90-121, March.

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