A study of the relationships between the time charter and spot freight rates

Abstract

A time charter contract is a shipping contract that allows for freight rate risk avoidance and hedging. Defining the relationship between time charter and spot freight rates will illuminate the fluctuation mechanism of the spot freight market. In this article, three types of dry bulk ships – Capsize, Panamax and Supramax – are chosen to investigate the relationship between time charter and spot freight rates and to analyse the price discovery function of time charter contracts. A vector error correction model is developed, and an impulse response function is used to analyse the influence of time charter rates on spot freight rates. Empirical studies indicate that there are two-way lead–lag relationships between the time charter and spot freight rates and that a time charter contract has a price discovery function. Smaller ship sizes and longer durations lead to a stronger price discovery function.

Keywords:

• spot freight rate
• time charter
• VECM model
• dry bulk cargo shipping market

JEL Classification:

• L91
• C10
• C22

Acknowledgements

The authors would like to thank the anonymous referees for their valuable suggestions.