Transfer of Freight Rate Volatility on Ship Sale and Purchase Prices

This study investigates the freight rate volatility and the transfer of volatility to ship sale and purchase market. New-build and second-hand vessels are traded as capital goods; however, since the cost of maintaining a ship is very high, the shipping rate is the most important factor affecting ship's price. Therefore, market agents should have a proper understanding of the freight rate volatility and its impact on ship prices. To address this issue, the GARCH volatility model is used to explore the existence of volatility factors among ship markets, these markets are sale and purchase and the freight fare market. Based on the evaluation of the loss-making functions of the BEKK GARCH model, which considers the distribution of disruptive t-student, a more accurate estimate has been given to obtain a volatility transfer factor among the above markets.
The results show that freight market volatility in exist in VLCC and Suezmax markets based on the sales price index, but the mechanism of volatility is different among different types of ships. The two-way effect of the volatility transition has been observed in all markets, which shows that the lagged variance can affect the current variance in a similar market regardless of the transmission of volatility. A simple ratio is provided to guide investors optimize their cargo allocation. The findings of this paper can provide a good understanding of investment in these markets.