Value based trading of real assets in shipping under stochastic freight rates

Sigbjørn Sødal, Steen Koekebakker () and Roar Adland

Applied Economics, 2009, vol. 41, issue 22, 2793-2807

Abstract: The article uses a real options valuation model with stochastic freight rates to investigate market efficiency and the economics of switching between the dry bulk and the tanker markets in international shipping. A dry bulk carrier is replaced with a tanker when the expected net present value of such a switch is optimal from a real options based decision rule. Depending on the development of the markets a reversal may take place later. The cost and demand parameters upon which the decisions to switch are made, including the stochastic characteristics of freight rates, are estimated from an empirical analysis that is updated every week throughout a 12-year time period from 1993 to 2005. The second-hand market for bulk ships seems to have been efficient most of these years in the sense that market switching usually did not pay off, with one major exception: it seemed profitable in expectation to leave the dry bulk market and enter the tanker market over a significant period of time shortly after the millennium shift, and to return to the dry bulk market about three years later. These points in time corresponded with an unprecedented boom period in the tanker and dry bulk freight markets, respectively, and the result suggest that agents in the second-hand market were slow to adjust their expectations. In retrospect, such an investment policy also happened to be profitable compared to staying put in the tanker market, even after accounting for transaction costs.

Date: 2009
References: View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/00036840701720853 (text/html)
Access to full text is restricted to subscribers.

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:taf:applec:v:41:y:2009:i:22:p:2793-2807

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEC20

DOI: 10.1080/00036840701720853

Access Statistics for this article

Applied Economics is currently edited by Anita Phillips

More articles in Applied Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().