6533b85dfe1ef96bd12bdc79

RESEARCH PRODUCT

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

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description

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 millenn...