Shipping Freight Economics

As the world moves beyond the immediate impact of the pandemic, the integration of academic knowledge and data science remains pivotal in addressing complex global challenges. Maritime economists study shipping freight markets using theory formulation and make assumptions based on their understanding of the dynamics and interactions of freight markets and the rationality of shipping agents. This chapter aims to bridge the gap between maritime economic theory and shipping practice by discussing the usefulness of theoretical frameworks and applied methodologies in addressing freight dynamics and answering practitioners’ questions. The main contribution of this chapter is investigating the interlink between freight earnings dynamics and changes in market perception of risk by providing an empirical framework to estimate the start, end, and duration of shipping business cycles and module shipping earning dynamics. Results show that freight earnings switch between normal and non-normal earning periods and have distinctive characteristics. Changes in market perception of risk during business cycles are modelled using a Markov-switching dynamic risk premia framework. The magnitude of accumulated positive and negative shocks during each cycle is estimated by measuring the frequency of positive and negative shocks and real earning and are symmetric in normal market conditions and asymmetric in non-normal market conditions.