Correspondence: Wolfgang Bessler, Justus-Liebig-University Giessen, Licher Strasse 74, Giessen, Germany. Tel: +49 641 9922460; Fax: +49 641 9922469; E-mail: wolfgang.bessler@wirtschaft.uni-giessen.de

¹is Professor of Finance and Banking at the Justus-Liebig University Giessen. Prior to this, he was a faculty member at Syracuse University, Rensselaer Polytechnic Institute, and the Hamburg School of Economics. His main research interests are corporate finance, financial institutions, and asset management. He serves as a member on the editorial board of various international finance journals and advises firms in the financial services industry.

²holds the chair for Corporate Finance and Ship Finance at the University of Hamburg. Previously, he taught at the University of Basel, the University of St Gallen, and the WHU Otto Beisheim Graduate School. His research interests are corporate finance, asset pricing, and asset management. He serves as a member on the editorial board of various international finance journals and consults firms in the financial services industry.

³is a researcher at the chair for Corporate Finance and Ship Finance at the University of Hamburg. He holds a degree in physics and focuses in his research on corporate finance and asset pricing. He also works in the Group Risk Management at HSH Nordbank AG, a major ship financing institution. In addition, he advises financial institutions and governmental bodies on risk controlling issues.

Received 27 January 2008; Revised 27 January 2008.

Abstract

Over the last decade, various new asset classes have emerged as alternatives to the more traditional investments. Although they appear attractive at a first glance, there exists hardly any historical performance track record, and experience with the return generating variables is limited. For ship funds and the valuation of shipping projects, the prevailing freight rates are important price-determining factors. Therefore, knowledge about the time series properties of spot and forward freight rates is essential for a better understanding of the return generating process of ship funds. There are, however, several peculiarities. Because shipping is a nonstorable service, forward prices need not to be linked to spot prices by any direct arbitrage relationship. We test the implications of this notion by using data for Panamax size bulk carriers and find that even in informationally efficient markets spot freight rates are highly autocorrelated. In addition, spot and forward freight rates are cointegrated, and the equilibrium is established by spot rates converging to forward rates. An extension of the standard vector error correction model reveals time-variation in the adjustment speed. Overall, our empirical findings suggest that the time series properties of freight rates need to be well understood before investing in ship funds. Another important aspect is whether ship funds should hedge their freight rate exposure in the forward market to reduce the return volatility or whether investors can achieve the same outcome by holding ship funds in a portfolio context.