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Endogeneity of commodity price in freight cost models

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  • Lim, Kian Guan

Abstract

In this paper, we answer a novel question on how the value of goods carried can affect the freight cost. We focus on the issue based on a more specialized freight market involving transport of seaborne iron ore from mining ports to Qingdao in China during the period 2014 to 2019. We construct simultaneous systems of demand–supply equations on both the iron ore market and the freight market. In the models, we explain how endogeneity of iron ore as a regressor can arise due to the nexus between the two markets, and that the freight demand is largely a derived demand from iron ore demand by PRC firms importing the iron ore. Employing instrumental variable two-stage least squares regression, it is shown that iron ore price negatively affects, ceteris paribus, the freight rate of bulk carriers ferrying the iron ore. Industrial growth, bunker fuel oil, Baltic Dry Index, and transport distance have positive effects on the freight rates.

Suggested Citation

  • Lim, Kian Guan, 2022. "Endogeneity of commodity price in freight cost models," Journal of Commodity Markets, Elsevier, vol. 26(C).
    • Handle: RePEc:eee:jocoma:v:26:y:2022:i:c:s2405851321000507
    DOI: 10.1016/j.jcomm.2021.100217
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    More about this item

    Keywords

    Freight rate; Iron ore price; Endogeneity; Panel regression;
    All these keywords.

    JEL classification:

    • C0 - Mathematical and Quantitative Methods - - General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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