Stationarity of spot freight rates considering supply/demand effect

The mean-reverting nature of freight rates is one of the important subjects in maritime economics. The classic understanding of maritime economics (and that of the shipping industry) suggests that freight rate processes are mean-reverting and approach the level decided by the demand/supply ratio. Ho...

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Bibliographic Details
Published in:Journal of shipping and trade 2020-11, Vol.5 (24), p.1-9, Article 24
Main Author: Hayashi, Koichiro
Format: Article
Language:English
Subjects:
Annual conference of the International Association of Maritime Economists 2019
Business and Management
Cyclical fluctuation
Drybulk
Emerging Markets/Globalization
Logistics
Market
Original Article
Stationarity
Trade
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Summary:The mean-reverting nature of freight rates is one of the important subjects in maritime economics. The classic understanding of maritime economics (and that of the shipping industry) suggests that freight rate processes are mean-reverting and approach the level decided by the demand/supply ratio. However, statistical tests on freight rate processes often reveal these processes to be non-stationary, which means the processes would not have a mean-reverting nature. In this study, we investigated the mean-reverting nature of Panamax freight rates (Baltic Panamax 4 T/C Average) for two 'means': the actual freight rate process itself, and the deviation process of actual freight rates from estimated ones based on the demand/supply ratio. The AR (1) model can be applied to both processes, and their autoregressive coefficient φ was between 0 and 1. In the actual freight process, φ was close to 1, and a unit root test failed to reject that the process is non-stationary. By contrast, in the deviation process, φ was sufficiently smaller than 1, and a unit root test rejected that the process is non-stationary. The result can resolve the contradiction between two views on mean-reverting nature; if we focus on the actual freight rate process itself and do not consider demand/supply, the process is non-stationary and does not have a mean-reverting nature. If we focus on the deviation process of the actual freight rates from the level decided by the demand/supply ratio, the process is stationary and tends to approach zero.
ISSN:2364-4575
2364-4575
DOI:10.1186/s41072-020-00078-8