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Waves in Ship Prices and Investment

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  • Robin Greenwood
  • Samuel Hanson

Abstract

We study the returns to owning dry bulk cargo ships. Ship earnings exhibit a high degree of mean reversion, driven by industry participants' competitive investment responses to shifts in demand. Ship prices are far too volatile given the mean reversion in earnings. We show that high current ship earnings are associated with high secondhand ship prices and heightened industry investment in fleet capacity, but forecast low future returns. We propose and estimate a behavioral model that can account for the evidence. In our model, firms over-extrapolate exogenous demand shocks and partially neglect the endogenous investment responses of their competitors. Formal estimation of the model confirms that both types of expectational errors are needed to account for our findings.

Suggested Citation

  • Robin Greenwood & Samuel Hanson, 2013. "Waves in Ship Prices and Investment," NBER Working Papers 19246, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19246
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    Cited by:

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    2. Papapostolou, Nikos C. & Pouliasis, Panos K. & Nomikos, Nikos K. & Kyriakou, Ioannis, 2016. "Shipping investor sentiment and international stock return predictability," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 96(C), pages 81-94.
    3. repec:bla:eufman:v:24:y:2018:i:3:p:387-417 is not listed on IDEAS
    4. Hansen, Erwin & Wagner, Rodrigo, 2017. "Stockpiling cash when it takes time to build: Exploring price differentials in a commodity boom," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 197-212.
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    6. repec:eee:transe:v:122:y:2019:i:c:p:78-99 is not listed on IDEAS
    7. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2018. "Diagnostic Expectations and Credit Cycles," Journal of Finance, American Finance Association, vol. 73(1), pages 199-227, February.
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    10. Kilian, Lutz & Zhou, Xiaoqing, 2018. "Modeling fluctuations in the global demand for commodities," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 54-78.
    11. Kilian, Lutz, 2019. "Measuring global real economic activity: Do recent critiques hold up to scrutiny?," Economics Letters, Elsevier, vol. 178(C), pages 106-110.
    12. Alexandridis, G. & Sahoo, S. & Visvikis, I., 2017. "Economic information transmissions and liquidity between shipping markets: New evidence from freight derivatives," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 98(C), pages 82-104.
    13. repec:eee:transe:v:104:y:2017:i:c:p:36-51 is not listed on IDEAS
    14. Drobetz, Wolfgang & Menzel, Christina & Schröder, Henning, 2016. "Systematic risk behavior in cyclical industries: The case of shipping," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 88(C), pages 129-145.
    15. Sabrina Artinger & Thomas C. Powell, 2016. "Entrepreneurial failure: Statistical and psychological explanations," Strategic Management Journal, Wiley Blackwell, vol. 37(6), pages 1047-1064, June.
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    17. Ready, Robert & Roussanov, Nikolai & Ward, Colin, 2017. "After the tide: Commodity currencies and global trade," Journal of Monetary Economics, Elsevier, vol. 85(C), pages 69-86.
    18. Gulen, Huseyin & Ion, Mihai & Rossi, Stefano, 2019. "Credit Cycles, Expectations, and Corporate Investment," CEPR Discussion Papers 13679, C.E.P.R. Discussion Papers.
    19. Drobetz, Wolfgang & Haller, Rebekka & Meier, Iwan, 2016. "Cash flow sensitivities during normal and crisis times: Evidence from shipping," Transportation Research Part A: Policy and Practice, Elsevier, vol. 90(C), pages 26-49.
    20. Li, X. & Zuidwijk, R.A. & de Koster, M.B.M. & Dekker, R., 2016. "Competitive Capacity Investment under Uncertainty," ERIM Report Series Research in Management ERS-2016-005-LIS, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities

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