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VARIATIONS IN CHARTER RATES FOR A TIME SERIES BETWEEN 1971 AND 2002: CAN WE MODEL THEM AS AN EFFECTIVE TOOL IN SHIPPING FINANCE?

Alexandros M. Goulielmos and Elpiniki-Maria Psifia
International Journal of Transport Economics / Rivista internazionale di economia dei trasporti
Vol. 33, No. 2 (JUNE 2006), pp. 257-278
Published by: Accademia Editoriale
Stable URL: http://www.jstor.org/stable/42747801
Page Count: 22
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
VARIATIONS IN CHARTER RATES FOR A TIME SERIES BETWEEN 1971 AND 2002: CAN WE MODEL THEM AS AN EFFECTIVE TOOL IN SHIPPING FINANCE?
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Abstract

In this paper we adopted a methodology from a "heretic" literature of finance due to Mandelbrot. We calculated the duration of freight rate cycles. We believe in the benefit of the use of this information to inform officials dealing with shipping loans. We are convinced that financial cycles arise when banks are willing to finance ship buildings during boom periods, creating oversupply, and thus depressing the freight market by their own actions. The information about cycles, and especially the forecasting of cycles, is of utmost important in shipping loans. This is so because they are based on project financing, which means that ship revenue is crucial. A method known as Rescaled Range analysis is applied here to 379 monthly time freight rates. The data is taken from 1971 and 2002 (July) and is corrected for inflation (made stationary). The method used as mentioned is derived from H. E. Hurst (1951), as developed, popularized and brought to prominence by Benoit Mandelbrot (1960+, 1975-2004, especially 1997). The most important implication of this paper is that shipping freight series exhibit non-normality and long run dependence, rendering the use of random walk models such as GARCH problematic. A brief literature review is carried out to evaluate the models that have been used previously. Our results show that there are non-periodic cycles in the freight market calculated as having duration of 2.25 years and 5.25 years respectively Thus, the Hurst analysis and its relevant exponent H was found to be approximately equal to 0.95 over the period examined, indicating long-term persistence effects. These are very different from those in the behavior of the normal / random walk domain. Consequently, it is firmly concluded that the present and past influence the future. A brief comparison is made with the authors' previous work on the spot rate freight market.

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