The Study On Price Discovery Function Of Dry Bulk Time Charter Market

The international shipping industry is a high-price-risk industry, especially the dry bulk shipping market whose structure is approximately perfect competitive. The changing price brings a huge business risk to the dry bulk market participants. The entire dry bulk shipping market always pays attention to the issue -- "How to circumvent the freight rate risk"To avoid the freight rate risk, the shipping industry has launched a series of freight risk management products. Forward Freight Agreements (FFA) is the most widely used, the largest number of transactions of the shipping derivatives. A large number of existing literatures have proven that the FFA market has price discovery function. Similar to FFA, the rent rate in the dry bulk Time Charter (short for TC) contract is determined by two parties in consultation, including the judgment of the future freight trend. Analyzing the relationship between TC price and spot price, FFA price correctly can help to predict the spot freight rates more precisely, which is significantly important for shipping companies.This paper selects three types of dry bulk ships and durations of TC contract prices, as well as the corresponding Baltic Dry Index, FFA prices as the study objects, with the application of econometric methods, to study the relationships between the three prices. The empirical results show that two-way causal relationships exist between the spot freight rates, TC price and FFA price. The Time Charter market does have price discovery function weaker than the FFA market, and the smaller the ship, the longer the duration, the stronger the price discovery function is. The paper establishes a Vector Error Correction model based on TC price and FFA price, increasing the prediction of the future spot freight rates. The research provides theoretical support for shipping companies to predict future spot freight rates and avoid price fluctuation risk.