An econometric analysis of the dry bulk shipping industry : seasonality, market efficiency and risk premia
This thesis aims to investigate four main areas of interest in the functioning of different markets in the dry bulk shipping sector using recent econometric and time series techniques. These areas include; seasonality patterns in freight markets, the efficient market hypothesis and the existence of time-varying risk premia in freight rate and ship price formation, the dynamic interrelationships between freight rate levels and spillover effects in freight rate volatilities, between sub-markets of the dry bulk sector. The seasonal behaviour of' dry bulk freight rates is measured and compared across vessel sizes, contract duration and under different market conditions. Seasonality is deterministic rather than stochastic and it varies across vessel sizes, contract durations and market conditions. In particular, freight rates for larger vessels show higher seasonal variations than smaller ones. Seasonality in spot rates is higher than timecharter rates across the size. Also, seasonal fluctuations are found to be stronger during market expansions compared to market down turns. The validity of the expectations hypothesis of the term structure (EHTS) in the formation of both one and three-year time-charter rates is strongly rejected for all size carriers. Failure of the EHTS is attributed to shipowners' perceptions of risk regarding their decision to operate in spot or time-charter markets. Time-varying risk premia in the formation of period rates is found to be negative; shipowners are prepared to accept lower rates for the relative security of longer contracts. The higher risk involved in contracts with shorter term to maturity are thought to emanate from higher freight rate volatilities, relocation costs, risk of unemployment in spot markets as well as fluctuations in voyage costs. Investigating the dynamic interrelationships between freight rates for different size vessels and spillover effects between volatilities in spot and period markets reveal that the interaction between freight rates in the spot market is higher than in the period markets. It is also found that there is a unidirectional transmission of volatility from larger to smaller size vessels in both spot and period markets. Finally, results strongly reject the EMH in the market for newbuilding and secondhand dry bulk vessels. Failure of the present value model and price efficiency is attributed to the risk associated with holding these assets. Results of Generalised Autoregressive Conditional Heteroscedasticity in Mean (GARCH-M) models suggest that there is a positive relationship between time-varying risk and return on shipping investments, a result which is consistent with asset pricing theories in the financial economics literature.