The Relationship Between Commodity Prices and Freight Rates in the Dry Bulk Shipping Segment: A Threshold Regression Approach

Abstract

In the current paper, we examine the existence of possible threshold relationships in the commodity price – freight rate nexus, under or over which the relationship between the two changes. Using the first lag of the commodity price change as the threshold variable, we find that, in the case of large drops in commodity prices relationships can strongly change. In such cases, the impact is more passed on to freight rates than under normal conditions, while the prevalence of oil prices becomes less significant. Furthermore, in such occurrences, the relationship of freight rates with their lags is statistically significant suggesting that the shock is maintained in the system for longer. Intuitively, the empirical findings suggest that as commodity prices fall sharply, the freight rate needs to adjust more dynamically to such changes in order to maintain a more or less constant ratio of the transport cost to the end price of the commodity. As such, it appears that a change in the previous relationship between the two is warranted for this to happen. Finally, the results are also supportive of the existence of a lead-lag relationship between commodity prices and freight rates, in the large drop regime, in accordance with the literature.

Keywords: commodities, dry bulk, shipping freight rates, threshold regression

JEL Classification: G11, G12, G13, G20