Hedging ship price risk using freight derivatives in the drybulk market

We show that a fixed-maturity time-weighted Forward Freight Agreement (FFA) portfolio should be used to proxy the expected future earnings of a vessel. We investigate the corresponding hedging efficiency when using a portfolio of FFA prices to hedge ship price risk of both static hedge ratios calculated using Ordinary Least Squares estimation and the dynamic hedge ratios generated from a dynamic conditional correlation GARCH (1,1) model. We find that the hedging efficiency is greater for newer vessels than older vessels and that the static hedge ratio outperforms the dynamic hedge ratio. Our work is an extension of earlier empirical work which has only considered the hedging efficiency of varying-maturity calendar FFA contracts for a single vessel age.publishedVersio

Ship Valuation Using Cross-Sectional Sales Data: A Multivariate Non-Parametric Approach

Despite the illiquid and heterogeneous nature of the second-hand market for bulk ships and the resulting difficulty of creating reliable time series of ship prices for generic ships, the literature on ship price dynamics relies heavily on time series models. In this paper we present, for the first time, an analysis of ship valuation using cross-sectional data based on actual sale and purchase transactions in the second-hand market for bulk ships. This allows us to investigate price formation in the second-market free of broker bias and measurement error. Moreover, we do not impose a strict linear model specification but allow for the presence of non-linearity in a flexible non-parametric vessel valuation function. Based on data from more than 1,850 individual sales of Handysize bulk carriers from January 1993 to October 2003, we find that the second-hand value of a vessel can be well described as a partially non-linear function of three main factors: DWT, age, and the state of the freight market. Maritime Economics & Logistics (2007) 9, 105–118. doi:10.1057/palgrave.mel.9100174

Econometric Modelling of Second-hand Ship Prices

This paper provides an econometric analysis of second-hand ship prices. It starts with a presentation of previous attempts to model second-hand ship prices and their shortcomings. After that a theoretical Error Correction Model is developed making up for these shortcomings. Its results are analysed and compared to those of an atheoretical Autoregressive Model within the context of Econometric Business Cycle Research. This allows the model to describe and forecast cycles and to evaluate policies. It is demonstrated that second-hand prices of different ship sizes/segments react differently to changes in the market variables that determine them. This provides support for performing analysis at a disaggregated rather than an aggregated level. Newbuilding and timecharter rates have the greatest effect of all variables on the determination of second-hand prices, in most cases both in the short and the long run. The cost of capital is only significant for bulk carrier owners. The only exception is the Suezmax segment due to its particular characteristics. Finally, it is found that the size of the orderbook, as a percentage of the fleet, has a negative effect on the prices of second-hand vessels only in the long run and only in large and Panamax tankers. Maritime Economics & Logistics (2003) 5, 347–377. doi:10.1057/palgrave.mel.9100086

Asset Bubbles in Shipping? An Analysis of Recent History in the Drybulk Market

The purpose of this paper is to investigate the hypothesis that the freight market boom in the drybulk freight market between 2003 and 2005 caused asset values in the second-hand market to deviate from underlying fundamentals. We test the instantaneous equilibrium relationship between the markets for second-hand ships, newbuildings and freight in a Vector Error Correction Model (VECM) framework. We also estimate and account for the time-varying delivery lag in the newbuilding market. Our empirical results suggest that the second-hand market was closely cointegrated with the fundamental freight and newbuilding market with no evidence of a short-term asset ‘bubble’. Maritime Economics & Logistics (2006) 8, 223–233. doi:10.1057/palgrave.mel.9100162