A Discrete-Time Stochastic Partial Equilibrium Model of the Spot Freight Market

This paper presents a stochastic extension of the classical partial equilibrium models of the spot freight market. The supply of sea transport in the model is based on microeconomic analysis of the supply characteristics of a given fleet and orderbook, in this case the VLCC fleet. It also develops a fully stochastic representation of the aggregate scrapping and contracting behaviour in the market. Combined with stochastic demand, the model is used to simulate the probability distribution of future spot freight rates and fleet size conditional on current market conditions. The model can be applied to a wide range of maritime economic problems such as the evaluation of risk for ship loans and freight derivative portfolios. © 2007 LSE and the University of Bath