Excess returns in the spot market for bulk carriers
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Excess returns in the spot market for bulk carriers Vangelis Tsioumas and Stratos Papadimitriou Department of Maritime Studies, University of Piraeus, Gr. Lampraki 21 & Distomou, Piraeus 185 32, Greece. E-mails: [email protected]; [email protected]
Abstract
The present study investigates the excess return dynamics between time charter (t/c) trip charters and their underlying voyage charters in the dry bulk market. Using a weekly data set over the period January 2003 to January 2014, we first examine the existence of a long-term co-integrating relationship between trip charters and their respective voyages expressed in Time Charter Equivalents. Then we develop a new methodology based on technical analysis in order to identify excess return signals and form a trading strategy. The results show that our approach outperforms the benchmark strategy of always chartering in vessels on t/c trip charters and perform the underlying voyage charters. Our analysis can be used by ship operating companies as a guide to select voyages with the highest probability of excess returns and adapt their chartering strategies accordingly.
Maritime Economics & Logistics (2015) 17, 399–415. doi:10.1057/mel.2014.34; published online 18 December 2014
Keywords: shipping; freight market; time charter; voyage charter; technical analysis; co-integration
Introduction The dry bulk market offers its participants the flexibility of entering into a charter party after choosing among a variety of contracts with different maturities. The modeling of the spot and period rates, as well as the examination of their relationship, has been in the forefront of freight market research over the last years. An abundance of research has been conducted to investigate the relationship between spot and long-term rates in the context of the Efficient Market Hypothesis (EMH), while several other studies test the validity of EMH in the © 2015 Macmillan Publishers Ltd. 1479-2931 Maritime Economics & Logistics www.palgrave-journals.com/mel/
Vol. 17, 4, 399–415
Tsioumas and Papadimitriou
freight markets. Zannetos (1966) is the first to study the effect of short-term expectations on freight rates. In particular, he presents the bond market concept of term structure as a relationship between spot and period rates. However, he does not take into consideration that in the longer term, regardless of the shortterm trends, market expectations cannot be fully reflected in the current t/c rates due to additional costs resulting from delays and so on. Glen et al (1981) examine the risk premium for the tanker market, assuming that the t/c income is equal to the present value of a series of spot contracts over the same duration. Their conclusion is that the estimated risk premium is not significantly different from 0. However, while acknowledging the existence of the Expectation Hypothesis they do not check its validity. This is done by Hale and Vanags (1989) who test the Expectation Hypothesis in the dry cargo market and their tests either reject it or lack the necessary
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