The Theoretical Foundations of the Freight Market

Elias Karakitsos and Lambros Varnavides
Additional contact information
Elias Karakitsos: University of Cambridge
Lambros Varnavides: Royal Bank of Scotland

Chapter 2 in Maritime Economics, 2014, pp 11-40 from Palgrave Macmillan

Abstract: Abstract In the traditional model of the freight market, which dates back to the 1930s, freight rates are determined in a perfectly competitive market, where the stock of fleet is predetermined at any point in time. This implies that freight rates adjust instantly to clear the demand-supply balance, where supply is fixed. Accordingly, freight rates respond exclusively to fluctuations in demand, rising when demand increases and falling when demand falls. This assumption introduces an element of irrationality on the part of both owners and charterers because the supply is constantly changing — new ships arrive in the market all the time. A cursory look at deliveries of new vessels shows that there are significant changes in supply from month to month. Hence, the assumption that supply is fixed in the short run is not appropriate. Instead, both charterers and owners form expectations of demand and supply and this requires a dynamic analysis rather then a static one in which the fleet is fixed. In this chapter we suggest an alternative theorising of the freight market, which captures this dynamic analysis of freight rates. This new framework consists of a bargaining process over freight rates in which charterers and owners form expectations of demand and supply over an investment horizon relevant to their decisions. In this framework, freight rates are viewed as asset prices, which are determined by discounting future economic fundamentals.

Keywords: Bargaining Power; Risk Premium; Spot Rate; Spot Market; Shipping Service (search for similar items in EconPapers)
Date: 2014
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-38341-9_2

Ordering information: This item can be ordered from
http://www.palgrave.com/9781137383419

DOI: 10.1057/9781137383419_2

Access Statistics for this chapter

More chapters in Palgrave Macmillan Books from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().