ECONOMETRIC MODELING OF OCEAN FREIGHT RATES: THE CASE OF TANKERS by DIMITRIS AYVATOGLU B.Sc. MECHANICAL ENGINEERING - BROWN UNIVERSITY, 1999 B.A. BUSINESS ECONOMICS - BROWN UNIVERSITY, 1999 SUBMITTED TO THE DEPARTMENT OF OCEAN ENGINEERING IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN OCEAN SYSTEMS MANAGEMENT AT THE MASSACHUSETTS INSTITUTE OF TECHNOLOGY JUNE 2001 C 2001 Massachusetts Institute of Technology. All rights reserved. The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part. Signature of Author:...................... .. ....... .............. Department of Ocean Engineering May 11, 2001 Certified by:........................ ............................ Professor Henry S. Marcus Professor of Marine Systems Thesis Supervisor Accepted by: .................................... Professor Henrik Schmidt MASSACHUSETTS INSTITUTE Professor of Ocean Engineering OF TECHNOLOGY Chairman, Department Committee on Graduate Students JUL 112001 LIBRARIES BARKER Econometric Modeling of Ocean Freight Rates: The Case of Tankers by Dimitris Ayvatoglu Submitted to the Department of Ocean Engineering on May 11, 2001 in Partial Fulfillment of the Requirements for the Degree of Master of Science in Ocean Systems Management Abstract The aim of this thesis is to investigate the efficiency of the tanker freight market, and at the same time illustrate shortcomings in the prevailing econometric methodology. The analysis is based on three different vessels: a product tanker, a suezmax tanker, and a VLCC tanker. The first part of the paper gives an overview of the maritime industry, focusing on the economic forces behind the cyclicality of the freight market. The second part of the paper applies the Box-Jenkins methodology to model the earnings time series of the above-mentioned vessels using an ARIMA- type model. The results show evidence against an efficient market for the product tanker, whereas they are inconclusive as far as the suezmax and VLCC tankers are concerned. The third part of the paper identifies possible shortcomings of the ARIMA class of models, as they are applied to the maritime industry. To correct for those, an R/S analysis is performed on the same earnings time series. This second approach verifies that there are inefficiencies in the product tanker freight market. Moreover, it provides evidence against an efficient VLCC freight market. On the other hand, the suezmax earnings time series is shown to be perfectly random, hence rendering this particular freight market efficient. Thesis Supervisor: Henry S. Marcus Title: Professor of Marine Systems 3 4 Biography of Author Dimitris Ayvatoglu was born in Athens, Greece in 1976. He attended Athens College from which he received his High School Diploma in June of 1995. In September of 1995, Mr. Ayvatoglu started his undergraduate studies at Brown University of Rhode Island. He graduated in 1999 with a dual degree in Mechanical Engineering and Business Economics, with a Magna Cum Laude distinction. Mr. Ayvatoglu continued his academic career at the Massachusetts Institute of Technology. He joined the Ocean Engineering Department and concentrated in Ocean Systems Management. Mr. Ayvatoglu is expected to graduate from MIT in June of 2001 with a Master of Science degree in Ocean Systems Management. Mr. Ayvatoglu has been following the maritime industry closely for the past several years. During the summer recessions he worked part-time in various shipping-related firms in Piraeus, Greece. Mr. Ayvatoglu is fluent in Greek and English. Acknowledgements I would like to start by thanking my advisor and thesis supervisor, Dr. Henry Marcus, for his continuous support during the past two years. His enthusiastic and easygoing character was an essential ingredient of this graduate thesis. Furthermore, this thesis could not have been written without Marsoft, Inc.'s kind gesture of providing the author with the necessary data set. My sincere thanks also go to the whole Ocean Engineering faculty of MIT for their never-ending struggle for the bestowment of a better education. I would also like to thank my friends for their support, whether inside or outside the classroom. Finally, I would like to thank those who, in one way or another, have assisted me in successfully completing this project, by giving me advice and putting up with my temper through the long process of preparing this work. In particular, I would like to express my gratitude to Anastasia, Anthony, and Athina for their assistance in editing the text. Dimitris Ayvatoglu May 11, 2001 5 6 This work is dedicated to Vassili, Irini and Gianni, who have guided me, encouraged me, inspired me and sustained me all these years. Most of all, I am grateful to them because they have believed in me, through good times and bad. 7 8 Table of Contents Abstract ......................................................................................................... 3 Biography of Author...................................................................................... 5 Acknow ledgem ents........................................................................................ 5 Table of Contents ............................................................................................ 9 List of Figures............................................................................................... 12 List of Tables ................................................................................................ 13 Chapter 1 Introduction..................................................................... 15 1.1 Scope of Thesis................................................................ 16 1.2 Overview of Subsequent Chapters................................... 17 Chapter 2 The M aritim e Industry ..................................................... 19 2.1 The Cost of Transport ...................................................... 19 2.2 The Tanker Sector............................................................ 22 2.3 Supply vs. Dem and ........................................................... 23 2.4 M arket Cycles.................................................................. 26 2.4.1 Short Cycles .................................................................. 27 2.4.2 Long Cycles .................................................................. 28 2.5 Historical Overview ............................................................ 29 Chapter 3 Literature Survey and M otivation.................................. 31 3.1 Supply - Dem and Models ................................................ 31 3.2 The Mean Reverting Nature of Freight Rates................... 33 3.2.1 Introduction to Stochastic Variables ............................. 34 3.2.2 Mean Reversion............................................................. 34 3.3.3 Concerns ....................................................................... 36 Chapter 4 Tim e Series M odels ......................................................... 39 4.1 Com m on Tim e Series Features ....................................... 40 4.1.1 Trends ........................................................................... 40 9 4.1.2 Seasonality, Conditional Heteroskedasticity, and Non- L ine a rity ........................................................................ 4 2 4.2 ARIMA Modeling of Time Series ....................................... 43 4.2.1 The Autoregressive (AR) Model ................................... 43 4.2.2 The Moving Average (MA) Model ................................. 44 4.2.3 The Autoregressive Integrated Moving Average Model (A R IM A ) ........................................................................ 4 5 4.3 The Box - Jenkins Methodology ....................................... 46 4.3.1 Identification ................................................................. 46 4.3.2 Estimation.................................................................... 48 4 .3.3 D iagnostics ................................................................... 49 4.3.4 Forecasting .................................................................... 49 4.3.5 AR, MA and VAR in the Literature................................. 50 Chapter 5 ARIMA Modeling of the Tanker Sector .......................... 51 5.1 Description of Data........................................................... 51 5.2 Modeling Procedure ........................................................ 53 5 .3 R e su lts............................................................................. .. 5 3 5.3.1 Product Tanker Model ................................................... 53 5.3.2 Suezmax Tanker Model 1............................................. 55 5.3.3 Suezmax Tanker Model 2.............................................. 57 5.3.4 VLCC Tanker Model 1 ................................................... 58 5.3.5 VLCC Tanker Model 2................................................... 60 5.4 Comments ........................................................................ 61 Chapter 6 A Non-Gaussian Approach to Modeling........................63 6.1 Random W alks and Efficient Markets .............................. 63 6.2 R/S Analysis of the Tanker Sector.................................... 66 6.3 Comments ........................................................................ 67 Chapter 7 Concluding Remarks.......................................................69 7.1 Suggestions