Disentangling supply and demand shocks in the tanker shipping market : a structural vector autoregressive analysis of freight rate shocks and global stock returns

Abstract

This paper utilizes structural vector autoregression to analyze the dynamics of the tanker shipping market. Inspired by Kilian (2009) we suggest a structural decomposition of the real tanker freight rate into three components: total tanker supply shocks; global aggregate demand shocks; and tanker-specific demand shocks. To our knowledge, this is the first study to disentangle and estimate the dynamic effects of supply and demand shocks to the real tanker freight rate. The response in the freight rate is found to differ considerably depending on the type of shock impacting it. Additionally, it is shown that the tanker-specific demand shocks are most important in determining real tanker freight rates. However, through a historical decomposition, the paper demonstrates that the relative importance is subject to the market conditions of specific time periods. Through an extension of the model used to disentangle the supply and demand shocks, the paper investigates the potential of the real tanker freight rate as a leading indicator. The results do not indicate a reliable relationship between global total stock market returns and the real tanker freight rates.