This paper compares volatility estimates between time-charter and spot rates between different sizes of dry bulk vessels. Time-charters are more volatile than spot rates, and small vessels are less risky than larger ones when spot rates are used. Ship owners who are risk averse should utilise the spot market in preference to time-charters, and invest in smaller vessels.
Topic: 3.1 Cargo shipping
The expectations hypothesis of a relationship between spot and period rates is rejected for the smaller ships, and has only weak support in results for ships of 120, 000 DWT.
A Comment on the paper by J.E. Davies in the September issue of the Journal and a rejoinder by the author.
If a lower cost entrant cannot satisfy the shipper’s demand for frequency, the shipper will prefer to make loyalty contracts with the conference, so that the entrant will be effectually excluded.
The author uses Canadian data to show that the liner shipping industry is almost perfectly contestable and fulfils all the requirements of the theory.
There are economies of trade density in liner shipping, but they are not enough to preclude social optimal pricing. trade density has hardly any effect on freight rates.