Modelling the Relationship between Ship Price and Freight Rate with Structural Changes

This study examines the relationship between the freight rate and ship prices, incorporating the influence of structural changes. The long-term ship price-freight rate relationship is modelled based on ship investment decisions, with the assumption that the freight rate follows an extended mean-reverting process. Theoretically, the sensitivity of ship prices to freight rate changes is found invariant to structural change. Empirically, we verify this result and find that the sensitivity is lower for larger ships and for new ships. We also find that second-hand ship investors are more interested in short-term benefits. © 2015 LSE and the University of Bath