Fear index and freight rates in dry-bulk shipping markets

ABSTRACT

This study constructs a fear index for the dry-bulk shipping market. Principal component analysis and min-max scaling are employed to extract the fear sentiment of the four dry-bulk vessel sectors. The main findings are as follows: (1) the fear index could play as a contrarian predictor of the freight rate; (2) the fear index spiked sharply responding to the major financial risk events; (3) ship operators are less risk-averse than investors in financial markets, so the asymmetric effect of the fear index on the freight-rate return is unique; and (4) the fright-rate volatility is positively affected by the fear index, and the asymmetry varies by the vessel sizes. These findings demonstrate that the fear index increases the predictability of freight rate, and helps investors to measure the level of risk or stress in the market.

KEYWORDS:

• Market sentiment
• fear index
• dry-bulk shipping
• freight rate
• asymmetric effect

JEL CLASSIFICATIONS:

• G00
• G41
• R40

Disclosure statement

No potential conflict of interest was reported by the authors.