Asset bubbles in shipping? : an analysis of recent history in the drybulk market

Abstract

The purpose of this paper is to investigate the hypothesis that the supercycle in the drybulk freight market between 2003 and 2005 caused asset values in the second -hand market to deviate from underlying fundamentals. We test the instantaneous equilibrium relationship between the actual second-hand values and those implied by the newbuilding and freight market conditions in a Vector Error Correction Model (VECM) framework. We also estimate and account for, for the first time, the time-varying delivery lag in the newbuilding market. Our empirical results suggest that the second-hand market was closely cointegrated with the fundamental freight and newbuilding market with no evidence of a short-term asset “bubble”.