Real options econometrics for aggregate tanker investment decisions

Abstract

Understanding the limitations of the Discounted Cash flow Methodology (DCF) has resulted in increased usage of the real option analysis for ship investment decisions under uncertainty. In this paper, our contribution is twofold: We propose an equilibrium model for explaining aggregate investment behaviour in the new building industry for tankers and provide a framework for testing the real option markup hypothesis in our model for investment decisions in new tanker vessels. Under relevant aggregation assumptions, count data models are employed to test the robustness of the real options hypothesis and its impact on investment decisions.

Investment into container shipping capacity: A real options approach in oligopolistic competition

“…Pires et al (2012) apply the concept of real options to the valuation of an abandonment option, answering the question of whether to own or charter a vessel. Dikos (2008) creates an equilibrium model covering aggregate investment behavior in the tanker new building market and proves the validity of the ''option value multiple" hypothesis, i.e. that the real options value of an investment project is an adequate statistic to describe aggregate investment decisions.…”

Real Options in Ship and Force Structure Analysis: A Research Agenda

“…Dikos (2008) and Dikos and Thomakos (2007) have continued this research thread. Bendall and Stent (2005) examined container shipping.…”

A Critical Review of the Literature on Firm-Level Theories on Ship Investment

“…As a alternative to the static DCF method, the dynamic Real Option Analysis (ROA) method was introduced by Dixit and Pindyck (1994) and is widely applied in the shipping industry (Bendall and Stent 2005;Bendall and Stent 2007;Dikos 2008;Dikos and Marcus 2003;Dixit and Pindyck 1994;Gkochari 2015). The ROA is treated as an alternative method to manage capital budgeting process under uncertainty and irreversibility with additional options which can be exchanged with low-risk income streams associated with one strategy with that of another strategy (Bendall and Stent 2007).…”