Is dry bulk shipping a rational market? : historical analysis from an intrinsic value perspective

Abstract

Dry bulk shipping is unique due to its near “perfect-competition” market characteristics. To complicate matters further, there is a significant supply side delivery delay in case of unexpected demand changes. Both of these factors contribute to the high volatility inherent in the sector. This paper aims to test whether dry bulk shipping exhibits irrationality in the pricing of second-hand vessels using data from 1977-2014. Two distinct valuation models are employed for identifying the intrinsic value of bulkers and compare these to the market price of the vessels. The purpose of the paper is to test for the presence of irrational investment behavior during the last three decades in the dry bulk space. Equally important is testing whether intrinsic value measures introduced are able to predict investment returns. Findings reject the presence of irrational investment behavior in the overall sector. Nevertheless, the intrinsic value models are able to rank subsequent investor returns depending on the level of under- / overvaluation. Through applying fundamental valuation in the dry bulk sector, this research provides worthy tools for decision-makers to achieve superior returns on investment.