Waves in Ship Prices and Investment

59 Pages Posted: 27 Jul 2013 Last revised: 2 Feb 2025

See all articles by Robin M. Greenwood

Robin M. Greenwood

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Samuel Gregory Hanson

Harvard University - Business School (HBS)

Date Written: July 2013

Abstract

We study the returns to owning dry bulk cargo ships. Ship earnings exhibit a high degree of mean reversion, driven by industry participants' competitive investment responses to shifts in demand. Ship prices are far too volatile given the mean reversion in earnings. We show that high current ship earnings are associated with high secondhand ship prices and heightened industry investment in fleet capacity, but forecast low future returns. We propose and estimate a behavioral model that can account for the evidence. In our model, firms over-extrapolate exogenous demand shocks and partially neglect the endogenous investment responses of their competitors. Formal estimation of the model confirms that both types of expectational errors are needed to account for our findings.

Suggested Citation

Greenwood, Robin M. and Hanson, Samuel Gregory, Waves in Ship Prices and Investment (July 2013). NBER Working Paper No. w19246, Available at SSRN: https://ssrn.com/abstract=2298958

Robin M. Greenwood (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6979 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Samuel Gregory Hanson

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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