Roar Adland

MODELLING FORWARD FREIGHT RATE DYNAMICS -- EMPIRICAL EVIDENCE FROM TIME CHARTER RATES

The purpose of this paper is to investigate the dynamics of forward freight rate dynamics. We specify our model in a Heath–Jarrow–Morton framework. This model was originally developed for interest rate markets and, in subsequent work, the model has been applied to various commodity markets. We analyse ten years of weekly time charter (TC) rates for a Panamax 65,000 dwt bulk carrier. Our data set consists of 6-, 12- and 36-month TC rates. We use this data to construct, each day, a forward rate function using a smoothing algorithm. We use the smooth data to investigate the factors governing the dynamics of the forward freight rate curve. We find a strange volatility structure in the data. Out results show that the volatility of the forward curve is bumped, with volatility reaching a peak for freight rates with roughly one year to maturity. Also, correlations between different parts of the term structure are in general low and even negative.The purpose of this paper is to investigate the dynamics of forward freight rate dynamics. We specify our model in a Heath--Jarrow--Morton framework. This model was originally developed for interest rate markets and, in subsequent work, the model has been applied to various commodity markets. We analyse ten years of weekly time charter ( TC ) rates for a Panamax 65,000 dwt bulk carrier. Our data set consists of 6-, 12- and 36-month TC rates. We use this data to construct, each day, a forward rate function using a smoothing algorithm. We use the smooth data to investigate the factors governing the dynamics of the forward freight rate curve. We find a strange volatility structure in the data. Out results show that the volatility of the forward curve is bumped, with volatility reaching a peak for freight rates with roughly one year to maturity. Also, correlations between different parts of the term structure are in general low and even negative.

Market Efficiency in the Bulk Freight Market Revisited

Given that the freight rate is the price of a transportation service that cannot be traded or stored; the traditional form of the efficient market hypothesis (EMH) does not apply to the freight rate price process. However, the notion of market efficiency still applies in the freight market. In particular, under the hypothesis that the market is semi-strong-form efficient, it should not be possible to make excess profit by taking chartering positions in the freight market based on public information such as past levels of the spot freight rate or the shape of the term structure of freight rates. This paper contributes to the literature by proposing an alternative test of market efficiency in the bulk freight market. We utilize technical analysis based on the history of spot freight rates and investigate the profitability of such chartering strategies for a tanker operator. The chartering decisions are based on identification of the peaks and troughs in the freight market cycles using kernel smoothing of the spot freight rate history. The empirical results suggest that a large tanker operator (e.g. a pool) could have achieved significant profits without investing in ships by trading on such information, although this does not hold in the most recent subset of the sample.

Spatial efficiency in the bulk freight market

ABSTRACT In the short run, there can be substantial differences in spot freight earnings between geographical regions of the global freight market for bulk carriers. Such differences can be consistent with an efficient market if they are temporary and if they cannot be exploited financially by pursuing chartering strategies that are based on publicly available information. In this paper, we apply a simple optimal switching model to evaluate whether such chartering strategies exist. We model the spot freight rate differential between the Atlantic and Pacific basins as a mean-reverting Ornstein–Uhlenbeck process and the entry–exit decision using the discount factor approach, which results in optimal trigger values for the entry/exit from each basin. Our empirical results suggest that the market is spatially efficient during normal freight market conditions when there is a surplus of vessels. The tight market conditions during the 2003–2008 freight market boom caused a persistent upward bias in Atlantic freight rates, but also here we find little added value from pursuing an active switching strategy.

Are AIS-based trade volume estimates reliable? The case of crude oil exports

ABSTRACT Most global trade statistics in the public domain refer to official customs data, which are not generally available on a micro (individual cargo) level. With the increasing availability and completeness of ship positioning data from the global Automated Identification System (AIS), it is possible to derive more timely and detailed trade statistics for homogeneous commodity groups. The objective of this article is twofold: (1) to compare the accuracy of AIS-derived trade statistics to official customs data in the crude oil market and (2) to add a breakdown of trade by vessel size over time. We find that while AIS-derived data for seaborne crude exports show good alignment with official export numbers in aggregate, there are substantial temporal and geographical differences across countries and time due to the use of pipelines and transshipment in parts of the supply chain. We highlight the challenges in properly structuring and aggregating micro-level cargo data. Our findings are important for the proper derivation of shipping demand from trade data.

Valuing cargo flexibility in oil transportation

ABSTRACT The seaborne oil transportation market is served by two main types of vessels—crude oil tankers and product tankers. Product tankers are designed to move refined oil products, yet they can also opportunistically carry ‘dirty’ products such as crude and heavy fuel oil, subject to the cost of tank cleaning when re-entering the clean products trade. We apply an entry-exit real option model with a stochastic freight rate differential to derive optimal triggers for switching between the two cargo types and estimate the value of the switching option. We show that the value of active switching has grown over time, and generally exceeds the additional construction cost of a product tanker. Our findings are important both from a practical point of view and for our understanding of market integration in the tanker freight market. Specifically, shipowners can use our model as a basis for optimizing chartering policy for clean product tankers. We also show that there are periods where the dirty market is persistently stronger, and discuss the possible reasons for such apparent inefficiencies.

Vessel speed analytics using satellite-based ship position data

In the maritime supply chain, sailing speed is a key variable governing ship-to-air emissions and the profitability of vessels. While there can be substantial economic gains to be had from dynamic speed optimization, real-life constraints such as weather conditions, contractual limitations and supply chain considerations may govern the speed choice in practice. The increasing availability of high-frequency ship positions and vessel speeds reported by the terrestrial and satellite-based Automated Identification System (AIS) enables formal empirical testing of the determinants of vessel speed. We use a panel data set of nearly 62,000 weekly average speed observations for a fleet of 607 Very Large Crude oil Carriers (VLCCs) during 2013 - 2015 to estimate a multiple regression model with technical, operational and macro-economic variables. We find that macroeconomic variables have a marginal influence only on ballast speeds, while laden speeds are influenced mainly by whether the operator is also the cargo owner.

Multivariate Modeling and Analysis of Regional Ocean Freight Rates

In this paper, we propose a new multivariate model for the dynamics of regional ocean freight rates. We show that a cointegrated system of regional spot freight rates can be decomposed into a common non-stationary market factor and stationary regional deviations. The resulting integrated CAR process is new to the literature. By interpreting the common market factor as the global arithmetic average of the regional rates, both the market factor and the regional deviations are observable which simplifies the calibration of the model. Moreover, forward contracts on the market factor can be traded in the Forward Freight Agreement (FFA) market. We calibrate the model to historical spot rate processes and illustrate the term structures of volatility and correlation between the regional prices and the market factor. Our model is an important contribution towards improved modelling and hedging of regional price risk when derivative market liquidity is concentrated in a single global benchmark.

The impact of shipyard and shipowner heterogeneity on contracting prices in the newbuilding market

Purpose The purpose of this paper is to investigate the impact of shipyard and shipowner heterogeneity on the price formation for individual newbuilding contracts. Design/methodology/approach The model controls for the shipbuilding market cycle, input costs, firm size, yard experience and contract-specific variables and captures the impact of yard and owner heterogeneity in fixed-effects regressions. The data sample contains contract information on 3,759 tankers, bulkers and container vessels constructed at 77 shipyards between 1990 and 2014. Findings Although the newbuilding price benchmarks (market conditions) and gross domestic product per capita (salary costs) are influential covariates, the main conclusion is that shipyards and, particularly, shipowners play an influential role on the US

The non-linear dynamics of spot freight rates in tanker markets

per Compensated Gross Tonnage price level in individual contracts. Originality/value The paper represents the first study of the impact of buyer and seller heterogeneity at the micro level in the shipbuilding market.