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Market switching in shipping -- A real option model applied to the valuation of combination carriers

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  • Sødal, Sigbjørn
  • Koekebakker, Steen
  • Aadland, Roar

Abstract

This paper derives a real options model of flexibility and applies it to shipping, valuing the option to switch between the dry bulk market and wet bulk market for a combination carrier, a ship type that is capable of operating in both markets but that has fallen out of favor due to high price tags. The model is a mean-reverting (Ornstein-Uhlenbeck) version of a standard entry-exit model with stochastic prices. A closed form solution for the value of flexibility is derived, expressed in terms of Kummer functions. The estimated value of flexibility is related to historical price differentials between combination carriers and oil tankers of comparable size. Based on numerical experiments it is concluded that new combination carriers may enter the market in the near future.

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Bibliographic Info

Article provided by Elsevier in its journal Review of Financial Economics.

Volume (Year): 17 (2008)
Issue (Month): 3 (August)
Pages: 183-203

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Handle: RePEc:eee:revfin:v:17:y:2008:i:3:p:183-203

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Web page: http://www.elsevier.com/locate/inca/620170

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Cited by:
  1. Abadie, Luis M. & Chamorro, José M., 2009. "Income risk of EU coal-fired power plants after Kyoto," Energy Policy, Elsevier, vol. 37(12), pages 5304-5316, December.
  2. Axarloglou, Kostas & Visvikis, Ilias & Zarkos, Stefanos, 2012. "The Time Dimension And Value Of Flexibility In Resource Allocation: The Case Of The Maritime Industry," DUTH Research Papers in Economics 2-2012, Democritus University of Thrace, Department of Economics.
  3. Hagspiel, V., 2011. "Flexibility in technology choice: A real options approach," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5258278, Tilburg University.

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