Freight Dynamics within the Tanker Market: A Conditional multi- factor freight return model with Markov regime switching indicator functions as threshold parameters

Recent empirical studies in maritime economics define market contractions and expansions (market dynamic movements) as shipping agent controlled, distinguishing between cargo-owner and ship-owner markets. It is argued that freight dynamics are triggered by the activities of shipping agents, in the sense that both a higher earning market-state with high volatility and a lower earning market-state with low volatility are influenced by the activities of ship-owners and cargo-owners within freight markets (Abouarghoub, 2013). This argument is built on the widely accepted concept that the shape of the freight supply curve is due to freight supply elasticity, being high during contraction phases and low during expansion phases of the freight shipping cycle. This issue is explored further by investigating variations in freight risk-returns on the basis that “up” and “down” market movements are defined as shipping agent controlled. Thus, this paper aims to investigate the daily hire sensitivities of tanker vessels to market movements within the shipping industry using a multi-factor freight-return model during different market conditions, in particular before and during the most recent financial crisis. This investigation into the freight-return relationship shows that daily-hire sensitivities within tanker freight markets are distinctive and conditional on market agents’ behaviour.