A Structural Linkage Model for Freight Rates
33 Pages Posted: 11 Dec 2011 Last revised: 24 May 2013
Date Written: March 4, 2013
This paper examines the role of Capesize vessels in freight markets by proposing a continuous-time freight rate model based on the functional supply and demand curves. The model incorporates the market participant trading behavior in that high Capesize prices induce shipowners and charterers to switch from Capesize to Panamax vessels, resulting in the Panamax demand rise and high Capesize-Panamax price correlation, while high Panamax prices tend to reduce Panamax demand and Capesize-Panamax price correlation due to switching from Panamax to much smaller ships like Handysize vessels. The model can also represent the negative relationship between the price and volatility of freight rates, referred to as “leverage effect.” An empirical study estimates the model parameters using the Baltic Capesize index and Baltic Panamax index given by the Baltic Exchange in the recent upward trend periods. We demonstrate that the Panamax demand increases in Capesize prices and decreases in Panamax prices, resulting in high and low Capesize-Panamax correlation, respectively which is consistent with the model we propose. It may imply that Capesize vessels have an important role in the other freight markets of Panamax markets. It is also shown that the switching from Capesize to Panamax vessels in high Capesize prices is not observed after the end of 2010. As the additional examination, it is shown that the economical alternative use of Panamax to Capesize is seen during the Capesize price boom periods just before the financial turmoil in 2008 while the switching is not significant rather the contagion, weak though, is observed during the financial turmoil periods. These results may support the view that the important role of Capesize markets in freight markets has been highlighted during Capesize price increasing periods, i.e., economic booming or recovering periods, but the Capesize’s role has recently been violated partly due to the recent market trends such that the market disintegration proceeds since the upsurge of Chinese and Indian trades need much smaller vessels than Capesize vessels. Finally we show the leverage effects in freight markets often observed in security markets during almost all of the sample periods.
Keywords: Freight markets, supply and demand, Capesize and Panamax vessels
JEL Classification: C51, Q41, R41
Suggested Citation: Suggested Citation