The term structure of ocean freight rates

Abstract

This paper contains an empirical investigation of the relation between spot and period freight rates for the ocean dry bulk shipping market. This relation is commonly referred to as a term structure. This paper hypothesizes a present value model, expressing the period rate as expectations of future spot rates, to represent this relation. The present value model is estimated using a vector autoregressive modelling approach. Although formal tests on the vector autoregressive models reject a restriction imposed by the present value relation, alternative, informal, tests proposed in financial markets research show that there is, in fact, considerable evidence that the present value model provides a valid description of the relation between spot and period freight rates. The results in this paper, therefore, support the existence of a term structure in ocean freight rates.