Do Shipping Freight Rates Predict Stock Market Returns? An Empirical Study of the Relationship between Shipping Freight Rates and Broad Stock Market Returns

Abstract

Given the availability and real-time inference of shipping freight rates, they are often regarded as a gauge for the economy. Stock market commentators and participants often stress the importance of falling freight rates as a leading indicator of recession. This thesis investigate the relationship between shipping freight rates and stock market returns, to determine whether the former can predict the latter. Using a time series from 2000-2022, we find that an index for dry bulk freight rates significantly predicts the broad MSCI World, OSEBX, S&P500, and STOXX600 indices, with the most substantial predictability observed at a one-month lag. Our findings suggest that this predictability is not due to time-varying risk premium, thus challenging the efficient market hypothesis. Additionally, we find a feedback relationship between dry bulk freight rates and stock market returns, meaning that they both are helpful in predicting each other at different periods in time. Therefore we suggests complexity in the relationship that warrants further research. Furthermore, increasing dry bulk rates coincides with reduced stock market volatility. Moreover, we conclude that the relationship between dry bulk freight rates and stock market returns is time-varying and correlations becomes stronger during periods of financial uncertainty. The sign of the relationship during crisis periods depends on the behavior of supply and demand curves for shipping capacity before and during a shock. Our research enlightens shipping freight rates ability to predict stock market returns, offering valuable insights for investors, policymakers, and academics alike.