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Title: Ship investment : ship price-freight rate relationship, option value and strategic behaviour
Authors: Kou, Ying
Degree: Ph.D.
Issue Date: 2015
Abstract: This thesis focuses on ship investment decision in the shipping industry. It addresses three specific research questions: 1) How does the ship investment cost, as represented by ship price, relate to the freight rate in the shipping market? What is the influence of the famous cyclic nature of freight rate on the ship price? 2) What is the minimal market freight for ship investment if a shipping company has an option to delay? 3) In a competitive market, how does the optimal capacity expansion decision of individual shipping company affect the overall market capacity in the shipping industry? In the first part, a theoretical ship price-freight rate relationship is formulated from the ship investment decision of the individual ship-owner. To incorporate the possible structural changes, freight rate process is assumed to follow an extended mean-reverting process with a changing mean and several unknown structural changes over time. Theoretically, the sensitivity of ship prices to freight rate changes is found invariant to structural change. This result is verified by the empirical test. Empirical results also show that second-hand ship investors are more interested in short-term benefits comparing with the new-building ship investors. Based on the theoretical ship price-freight rate relationship derived from the first part, the second part analyzes the minimal market freight rate necessary for profitable ship investment, if shipping companies take into account the option value of delay the investment decision to a later date. Since the traditional net present value method ignores uncertainty, especially the cyclic nature in shipping market, the minimal freight rate derived using the real option approach can provide a better decision on whether to invest immediately, or delay. Theoretically, trigger rates for ship investment are developed under assumption of the geometric Brownian motion and the mean-reverting motion of freight rate for comparison. Empirical tests using monthly data show that most of the previous investment behaviour can be explained by the trigger rates obtained using the real option approach, especially when cyclic nature is clear.
The third research question comes from the phenomenon of recent ship investment behaviour in the shipping industry. After the financial crisis, the order volume of the new ships is still kept at a very high level. What are the motivations for these new orders facing an already over-crowded market? To investigate this issue, a duopoly game theoretic model is developed to study the impact of carriers’ strategic capacity expansion behaviour in a competitive market. Results in this part show that capacity expansion is a rational decision during both peak and trough shipping markets. The benefit of expansion is greater when the competitor also expands. Such expansion behaviour leads to chronic oversupply in shipping and Prisoner’s Dilemma. A numerical simulation is applied that confirms the analytical results. This study contributes on the investment decision theory in several ways. First, it suggests a way to anticipate the movement of ship price through modelling the ship price-freight rate relationship taking into account structural change, both theoretically and empirically. Secondly, it fills in the gap by theoretically analyzing the ship investment decision using Real Option approach, and contributes on the investment decision theory for projects with huge capital cost, long lifespan, and cyclic future market condition. Thirdly, this study contributes to the literature by analyzing strategic capacity expansion in shipping and its impact on market oversupply. In practical terms, this study can help different players in the shipping industry to better understand the relationship between shipbuilding market and freight market, understand different investment strategies, as well as better recognize the role of individual shipping company’s capacity expansion decision.
Subjects: Merchant marine.
Investments -- Decision making.
Hong Kong Polytechnic University -- Dissertations
Pages: xi, 145 pages : illustrations (chiefly color) ; 30 cm
Appears in Collections:Thesis

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