A directional relationship between freight and newbuilding markets : a panel analysis

Jane Jing XU, Cardiff University, United Kingdom
Tsz Leung YIP, The Hong Kong Polytechnic University, Hong Kong
Liming LIU, The Hong Kong Polytechnic University, Hong Kong

Copyright © Maritime Economics & Logistics

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Abstract

This article examines the dynamic relationship between international sea freight rate and newbuilding price by employing panel cointegration testing and estimating techniques. The primary question this article addresses is whether the goods (new ships) price and service (sea freight) rate lead or lag one another in a Granger-cause sense, or simultaneously move together. Monthly panel data on three different bulk shipping market segments over the period 1998-2009 are exploited in empirical analysis. Various panel unit root tests demonstrate that the data variables are integrated with unit roots, whereas panel cointegration techniques are used to estimate the dynamic relationship. A positive directional relationship from freight rate to newbuilding price is found, and freight rate is more sensitive to market changes than newbuilding price. These results indicate that investment in new ships is encouraged by a strong freight market.