The Value of Foresight in the Drybulk Freight Market

22 Pages Posted: 6 Feb 2018

See all articles by Vit Prochazka

Vit Prochazka

NHH Norwegian School of Economics - Department of Business and Management Science

Roar Adland

NHH Norwegian School of Economics

Stein W. Wallace

Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: January 25, 2018

Abstract

We analyze the value of foresight in the drybulk freight market when repositioning a vessel through space and time. In order to do that, we apply an optimization model on a network with dynamic regional freight rate differences and stochastic travel times. We evaluate the value of the geographical switching option for three cases: the upper bound based on having perfect foresight, the lower bound based on a "coin flip", and the case of perfect foresight but only for a limited horizon. By combining a neural network with optimization, we can assess the impact of varying foresight horizon on economic performance. In a simple but realistic two-region case, we show empirically that the upper bound for large vessels can be as high as 25% cumulative outperformance, and that a significant portion of this theoretical value can be captured with limited foresight of several weeks. Our research sheds light on the important issue of spatial efficiency in global ocean freight markets and provides a benchmark for the value of investing in predictive analysis.

Keywords: Dry bulk market, dynamic programming, neural network, foresight

JEL Classification: C44, C60, C61

Suggested Citation

Prochazka, Vit and Adland, Roar and Wallace, Stein W., The Value of Foresight in the Drybulk Freight Market (January 25, 2018). NHH Dept. of Business and Management Science Discussion Paper No. 2018/1, Available at SSRN: https://ssrn.com/abstract=3118170 or http://dx.doi.org/10.2139/ssrn.3118170

Vit Prochazka (Contact Author)

NHH Norwegian School of Economics - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Roar Adland

NHH Norwegian School of Economics ( email )

Helleveien 30
Bergen, NO-5045
Norway

Stein W. Wallace

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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