Short-run freight rate formation in the VLCC market: A theoretical framework

Jostein Tvedt
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Jostein Tvedt: Institute for Research in Economics and Business Administration, Bergen, Norway

Maritime Economics & Logistics, 2011, vol. 13, issue 4, 442-455

Abstract: The article derives a short-run freight rate equilibrium in the VLCC market based on only a limited number of market characteristics. Supply is characterised by the ships’ distance to the loading area. Demand is characterised by the point of time at which charterers prefer to dispatch their cargoes. The set of stable matches of tonnage and cargo is restricted upward by a maximum freight rate level, given in the case the shipowner sets the rate, and restricted downward by a minimum freight rate level, given the case the charterer sets the rate. In order to assign a unique freight rate to every match of cargo and tonnage we introduce, the shipbrokers’ perception of market psychology and their incentives to maximise expected revenues from commissions.

Date: 2011
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