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Spatial efficiency in the bulk freight market

ABSTRACT In the short run, there can be substantial differences in spot freight earnings between geographical regions of the global freight market for bulk carriers. Such differences can be consistent with an efficient market if they are temporary and if they cannot be exploited financially by pursuing chartering strategies that are based on publicly available information. In this paper, we apply a simple optimal switching model to evaluate whether such chartering strategies exist. We model the spot freight rate differential between the Atlantic and Pacific basins as a mean-reverting Ornstein–Uhlenbeck process and the entry–exit decision using the discount factor approach, which results in optimal trigger values for the entry/exit from each basin. Our empirical results suggest that the market is spatially efficient during normal freight market conditions when there is a surplus of vessels. The tight market conditions during the 2003–2008 freight market boom caused a persistent upward bias in Atlantic freight rates, but also here we find little added value from pursuing an active switching strategy.