Time Charter or Trip Charter? An Assessment of Market Efficiency in Shipping Market

Abstract

This paper explores the economic value of charter hire rate forecasts in the bulk shipping industry for ship operators by introducing a chartering strategy defined as a sequence of different types of contracts that maximises profit. Ship operators are assumed to divide ship use to trip charter and time charter market depending on the quarterly excess charter hire rate forecasts, i.e. the difference between time charter and trip charter (spot) rates. Ship operators use the recursive forecasting approach and switch the chartering strategy across the two positions. The decision is based on economic measurement rather than statistical significance. The economic benefits realized by ship operators who apply our forecasting rules exceed those derived from the fixed policy approach of using either alternative, and will be used to disprove the validity of the efficient market hypothesis. The paper applies the regression methodology and forecasts two steps ahead of quarterly spot prices regressed recursively on fixed variables, thus extending research in terms of the scope of analysis. We have applied statistical evaluation in addition to the economic evaluation and found that the proposed model outperforms the historical mean forecast. This paper emphasizes the importance of a sound diversification strategy within the business platform to target the more profitable business segment and test if macroeconomic indicators and commodity prices are satisfactory indicators for forecasting charter hire rate.