The Term Structure of Second-hand Prices: A Structural Partial Equilibrium Model

Abstract

Since the pioneering work of Koopmans (1939) and Mossin (1968) in Maritime Economics, the market for new vessels, the market for second-hand vessels, the freight rate market and finally the market for scrap have been considered as different markets where price is formed under the laws of supply and demand. In this paper, we consider the prices of new vessels and the charter rates as sufficient statistics for the value of second-hand vessels. Using modern finance theory, we derive a closed formula for the prices of second-hand vessels taking into consideration their Real Option value. We introduce two explanatory variables for second-hand prices and derive equilibrium prices in a partial equilibrium framework. Our model fits the data and provides some structural insight into the functional form of second-hand prices. Maritime Economics & Logistics (2003) 5, 251–267. doi:10.1057/palgrave.mel.9100084

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).…”

“…The studies after the 1990s are more likely to analyse specific vessel types, for example, Dikos and Marcus (2003) analysed the second-hand ship valuation by using newbuilding prices and charter rates on dry bulk shipping market over the period of 1976 and 2002. They developed the model based on the real options approach to analyse shipping investment decision and applied structural partial equilibrium framework to examine the prices of second-hand vessels through the prices of new vessels and the charter rates.…”

“…The empirical results show that the hidden asset play value in the prices of second-hand vessels had been empirically proven within the developed model. In line with Dikos and Marcus (2003), the study of Tsolakis et al (2003) examined the second-hand ship prices for the tanker and dry bulk markets from 1960 to 2001. They analysed the price valuation by Error Correction Model.…”

“…Both Dikos and Marcus (2003) and Tsolakis et al (2003) applied modern finance theories and advanced econometric methods: Real Option approach and Error Correction Model respectively. Analyzing the different shipping markets through financial theories and advanced econometric models contributed twofold to the literature: first, interpreting the industry with modern financial tools provided an insight to understand the second-hand ship valuation with a financial approach, second, advanced econometric tools eliminated previous statistical drawbacks such as multi-collinearity and heteroscedasticity problems.…”

Maritime Econometrics: Models of Dry Cargo Ships and Tankers, 1996-2005 Survey

“…This attracted most of the attention of research. In particular, there were examined: fleets' scale effects Cullinane and Khanna [86]; supply elasticities tied to costs [87] and 2 nd hand vessels [88].…”