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In the recent literature, empirical tests of stationarity of freight rates often conclude that spot freight rates are non-stationary processes. However, many maritime economists would argue that the freight rate cannot exhibit... more
In the recent literature, empirical tests of stationarity of freight rates often conclude that spot freight rates are non-stationary processes. However, many maritime economists would argue that the freight rate cannot exhibit asymptotically explosive behaviour, as implied by non-stationarity, in a perfectly competitive freight market. This paper restates the theoretical arguments behind mean reversion and boundedness of the spot freight
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ABSTRACT
The value of a real or financial option depends among other factors on the assumption of the underlying stochastic process. Linear and loglinear processes are most common, such as the arithmetic Brownian motion, the geometric Brownian... more
The value of a real or financial option depends among other factors on the assumption of the underlying stochastic process. Linear and loglinear processes are most common, such as the arithmetic Brownian motion, the geometric Brownian motion and the Ornstein-Uhlenbeck process. In the time series literature, non-linear continuous time models have been de-veloped. One such class of models is the threshold-autoregressive model, where the dynamic process changes character depending on whether the process is above or below a certain threshold. In this paper we investigate real option modelling when uncertainty can be described by a continu-ous time threshold autoregression. Closed form solutions to perpetual American options on such processes are derived. Various applications are studied, focusing on how uncertainty and non-linearity can affect option valuation and investment. This includes examples where uncertainty en-courages investment, contrary to the result with most real options m...
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In the recent literature, empirical tests of stationarity of freight rates often conclude that spot freight rates are non-stationary processes. However, many maritime economists would argue that the freight rate cannot exhibit... more
In the recent literature, empirical tests of stationarity of freight rates often conclude that spot freight rates are non-stationary processes. However, many maritime economists would argue that the freight rate cannot exhibit asymptotically explosive behaviour, as implied by non-stationarity, in a perfectly competitive freight market. This paper restates the theoretical arguments behind mean reversion and boundedness of the spot freight rate process and suggests that the failure to reject non-stationarity may be due to the weak power of tests most frequently used. We employ a non-linear version of the Augmented Dickey-Fuller (ADF) test, based on an exponentially smooth-transition autoregressive model (ESTAR). This test enhances the power against mean-reverting nonlinear alternative hypotheses compared to the linear alternative for traditional ADF tests. Our empirical results show, in line with maritime economic theory, that freight rates in both dry-bulk and tanker markets are non-...
The paper 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... more
The paper 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 shor...
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The markets for electricity, gas and temperature have distinctive features, which provide the focus for countless studies. For instance, electricity and gas prices may soar several magnitudes above their normal levels within a short time... more
The markets for electricity, gas and temperature have distinctive features, which provide the focus for countless studies. For instance, electricity and gas prices may soar several magnitudes above their normal levels within a short time due to imbalances in supply and demand, yielding what is known as spikes in the spot prices. The markets are also largely influenced by seasons, since power demand for heating and cooling varies over the year. The incompleteness of the markets, due to nonstorability of electricity and temperature as well as limited storage capacity of gas, makes spot-forward hedging impossible. Moreover, futures contracts are typically settled over a time period rather than at a fixed date. All these aspects of the markets create new challenges when analyzing price dynamics of spot, futures and other derivatives. This book provides a concise and rigorous treatment on the stochastic modeling of energy markets. Ornstein-Uhlenbeck processes are described as the basic m...
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In the recent literature, empirical tests of stationarity of freight rates often conclude that spot freight rates are non-stationary processes. However, many maritime economists would argue that the freight rate cannot exhibit... more
In the recent literature, empirical tests of stationarity of freight rates often conclude that spot freight rates are non-stationary processes. However, many maritime economists would argue that the freight rate cannot exhibit asymptotically explosive behaviour, as implied by non-stationarity, in a perfectly competitive freight market. This paper restates the theoretical arguments behind mean reversion and boundedness of the spot freight
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In this paper we derive a performance measure which is the most natural extension of the Sharpe ratio. This measure takes into account the skewness of return distribution and we denote it as the Adjusted for Skewness Sharpe Ratio (ASSR).... more
In this paper we derive a performance measure which is the most natural extension of the Sharpe ratio. This measure takes into account the skewness of return distribution and we denote it as the Adjusted for Skewness Sharpe Ratio (ASSR). We show that maximizing the ASSR is consistent with maximizing expected utility. The investor's prefer- ences for skewness in the
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In this paper using the expected utility theory and the approxi- mation analysis we derive a formula for the most natural extension of the Sharpe ratio which takes into account the skewness of distribu- tion. The ranking statistic based... more
In this paper using the expected utility theory and the approxi- mation analysis we derive a formula for the most natural extension of the Sharpe ratio which takes into account the skewness of distribu- tion. The ranking statistic based on the adjusted for skewness Sharpe ratio preserves the standard Sharpe ratio for normal distribution, de- creases ranking of distributions with
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In this paper we present a multi-factor continuous-time autoregressive moving-average (CARMA) model for the short and forward interest rates. This models is able to present a more adequate statistical description of the short and forward... more
In this paper we present a multi-factor continuous-time autoregressive moving-average (CARMA) model for the short and forward interest rates. This models is able to present a more adequate statistical description of the short and forward rate dynamics. We show that this is a tractable term structure model and provide closed-form solutions to bond and bond option prices, bond yields, and the forward rate volatility term structure. We demonstrate the capabilities of our model by calibrating it to market data and show that it can reproduce rather complex shapes of the empirical volatility term structure. In particular, a three-factor CARMA model can easily capture the dynamics of the level, slope, and curvature factors widely documented in term structure models.
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In this paper we investigate a continuous time autoregressive moving- average model (CARMA) for the instantaneous spot interest rate. This model can be interpreted as a generalized Vasicek (1977) model where higher order lags and moving... more
In this paper we investigate a continuous time autoregressive moving- average model (CARMA) for the instantaneous spot interest rate. This model can be interpreted as a generalized Vasicek (1977) model where higher order lags and moving average terms are allowed in the spot rate dynamics. Our model fit in the general ane class of term structure models, and we provide
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... For example, the BIFFEX (Baltic International Freight Futures Exchange) freight contracts that started trading on LIFFE (London International Financial Futures and Options Exchange) in 1985 was terminated in 2001 mainly due to low... more
... For example, the BIFFEX (Baltic International Freight Futures Exchange) freight contracts that started trading on LIFFE (London International Financial Futures and Options Exchange) in 1985 was terminated in 2001 mainly due to low liquidity. ...
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Despite the illiquid and heterogeneous nature of the second-hand market for bulk ships and the resulting difficulty of creating reliable time series of ship prices for generic ships, the literature on ship price dynamics relies heavily on... more
Despite the illiquid and heterogeneous nature of the second-hand market for bulk ships and the resulting difficulty of creating reliable time series of ship prices for generic ships, the literature on ship price dynamics relies heavily on time series models. In this paper we present, for the first time, an analysis of ship valuation using cross-sectional data based on actual
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... Clarkson Research Studies (2003) provided monthly data for TCE spot earnings, timecharter rates, operating costs and prices for 5-year old vessels in the four chosen bulk shipping sectors (VLCC, Aframax, Capesize, and Panamax bulker).... more
... Clarkson Research Studies (2003) provided monthly data for TCE spot earnings, timecharter rates, operating costs and prices for 5-year old vessels in the four chosen bulk shipping sectors (VLCC, Aframax, Capesize, and Panamax bulker). ... VLCC Aframax Panamax Capesize ...
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This paper examines the efficiency and predictive power of implied forward shipping charter rates. In particular, we examine whether implied forward 6-month time-charter rates, which are derived through the difference between... more
This paper examines the efficiency and predictive power of implied forward shipping charter rates. In particular, we examine whether implied forward 6-month time-charter rates, which are derived through the difference between time-charters with different maturities based on the term structure model, are efficient and unbiased predictors of actual future time-charter rates. Using a dataset for the period January 1989 to
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... (15a) ∆ = A ln μ (15b) ∆ - - = μ μ e Cm 1 Page 9. 9 (15c) ∆ - - = μ μ σ 2 2 1 2 e S where S is the standard deviation of ε, and Δ is the time between observations. Setting Δ=1/52, using the parameter estimates in Tab. 1, and assuming... more
... (15a) ∆ = A ln μ (15b) ∆ - - = μ μ e Cm 1 Page 9. 9 (15c) ∆ - - = μ μ σ 2 2 1 2 e S where S is the standard deviation of ε, and Δ is the time between observations. Setting Δ=1/52, using the parameter estimates in Tab. 1, and assuming 330 sailing days per ...