Seasonality Patterns in Tanker Spot Frei PDF

Economic Modelling 19 Ž2002.
747᎐782
Seasonality patterns in tanker spot freight

rate markets
Manolis G. Kavussanos a,b,U , Amir H. Alizadeh-M b
a
Department of Accounting and Finance, Athens Uni¨ ersity of Economics and Business,
76 Patission St, Athens, TK 104 34, Greece
b
Department of Shipping, Trade and Finance, City Uni¨ ersity Business School, Frobisher Crescent,
Barbican Centre, London EC2Y 8HB, UK
Accepted 20 April 2001
Abstract
The aim of this paper is to investigate the existence and nature of seasonality Ždeterminis-
tic or stochastic . in tanker freight markets and measure and compare it across sub-sectors
and under different market conditions Žexpansionary and contractionary. for the period
January 1978 to December 1996. The existence of stochastic seasonality is rejected for all
freight series while results on deterministic seasonality indicate increases in rates in
November and December and decreases in rates from January to April. Seasonality is found
to be varying across markets depending on vessel size and market condition. Seasonality
comparisons under different market conditions, an issue investigated for the first time in the
econometrics literature using Markov Switching models, reveal that seasonal rate move-
ments are more pronounced when the market is recovering compared to smaller changes
when the market is falling. This is well in line with the low and high elasticity of supply
expected in expansionary and contractionary periods of shipping markets. The results have
implications for tactical shipping operations such as budget planning, timing of dry-docking,
vessel speed adjustments and repositioning. As expected, the out-of-sample forecasting
performance of these Markov Regime Switching models is lacking somewhat, a result which
is thought to be a consequence of having to predict ‘states’ simultaneously with mean values.
䊚 2002 Elsevier Science B.V. All rights reserved.
JEL classifications: L91; L92; C22; C51; C53
Keywords: Shipping; Seasonality; Tanker freight rates; Markov switching; Market conditions; Forecast-
ing
U
Corresponding author. Tel.: q44-20-7040-8681; fax: q44-20-7040-8853.
E-mail address: m.kavussanos@city.ac.uk, mkavus@aueb.gr ŽM.G. Kavussanos..
0264-9993r02r$ - see front matter 䊚 2002 Elsevier Science B.V. All rights reserved.
PII: S 0 2 6 4 - 9 9 9 3 Ž 0 1 . 0 0 0 7 8 - 5
748 M.G. Ka¨ ussanos, A.H. Alizadeh-M r Economic Modelling 19 (2002) 747᎐782
1. Introduction
Freight rates and prices in the tanker shipping industry fluctuate considerably in
short periods of time. While part of these fluctuations are due to the general world
economic activity as well as the state of the tanker shipping market, a large
proportion of the within-the-year fluctuations is attributed to seasonal factors.
Seasonal behaviour of freight rates is an important factor in the formation of
transportation policy and affects the shipowners’ cash flow and charterers’ costs.
Yet, to our knowledge, there has been no systematic attempt in the past to
understand the nature and measure the magnitude of seasonal movements in
tanker shipping freight rates.1 The aim of this paper is to fill this gap in the
literature by concentrating on the movement of tanker freight rates within the year
and compare them across sub-sectors of the industry as well as over different
market conditions. The out-of-sample forecasting performance of different models
for seasonality is also investigated.
Like any other market, tanker freight rate markets are characterised by the
interaction of supply and demand for tanker shipping services. The demand for
tanker services is a derived demand which depends on the economics of the oil
markets and trade, world economic activity and the related macroeconomic vari-
ables of major economies, such as imports and consumption of energy commodities
Žsee Stopford, 1997 p. 238.. Such macroeconomic variables have been shown
elsewhere to be non-stationary with deterministic seasonal components in most
cases Žsee Osborn, 1990; Beaulieu and Miron, 1992; Canova and Hansen, 1995..
The same is also true for trade in oil and oil derivatives; for instance Moosa and
Al-Loughani Ž1994. found that there are seasonal elements in the petroleum and
petroleum products trades, Moosa Ž1995. found that there are elements of seaso-
nality in oil import figures of Group 7 countries; Girma and Paulson Ž1998. also
found seasonal patterns in the petroleum products futures markets. It is possible
then that, the seasonal patterns evident in the variables that generate demand for
shipping services are likely to make their way into tanker freight rates.
For analysis, the tanker market is disaggregated by vessel size into different
sub-markets, since different vessel sizes are involved in different trading routes and
regions of the world.2 Such sub-markets are thought to be distinct in terms of their
risk᎐return characteristics Žsee for example Kavussanos 1996a,b, 1998a,b.. Yet
there has been no systematic attempt in the past to understand the stochastic
behaviour of rates in each of these sub-markets. The issue ties in with the
investigation of seasonality since when, for instance, monthly data are used for
modelling, stochastic seasonal roots may appear in the data. This has important
implications when modelling the series. As Wallis Ž1974. notes, it is important to
study the seasonal behaviour of the data because using seasonally adjusted data
may distort the dynamics of the constructed models and result in biased estimates.
1
Seasonality, though, has been investigated in dry bulk markets by Kavussanos and Alizadeh Ž2001..
2
Four sub-sectors may be distinguished in the tanker market, details of which are in the data section.
M.G. Ka¨ ussanos, A.H. Alizadeh-M r Economic Modelling 19 (2002) 747᎐782 749
At the same time, knowing the seasonal behaviour of the data allows better model
specification, which in turn can improve the reliability of forecasts.
This paper contributes to the literature in a number of ways. First, it investigates
systematically the univariate properties of monthly tanker freight rate series in
terms of stationarity and seasonal unit roots. As a result, correct decisions can be
made about econometric modelling issues. Second, as a consequence of this
investigation decisions can also be made about the existence and nature of
seasonality in tanker freight markets. Third, seasonality is measured and compared
across tanker shipping freight markets and different market conditions. For this
purpose, Markov Regime Switching Seasonal ŽMRSS. models are used, for the first
time in the econometrics literature, to compare seasonal fluctuations in freight
rates between periods of market expansion and contraction. Finally, the out-of-
sample forecasting performance from these models is investigated with some
interesting results.
Examining the form and magnitude of seasonal fluctuations in tanker rates can
be beneficial to shipowners and charterers in their decisions regarding shipping
investments and operations. From the shipowners’ point of view such decisions
include: budget planning according to annual cash flow; as well as short vs. long
haul contracts in order to reduce back haul during high seasons; timing of dry
docking; speed adjustments; and vessel repositioning. Charterers also may use the
information on seasonal fluctuations in tanker freight rates to optimise their cost
by adjusting their inventory in order to reduce chartering requirements during high
seasons by building up sufficient inventory before the high season. Overall,
additional quantitative information about likely market conditions Že.g. seasonality
measurements. can improve operational decisions and strategic business plans.
This paper has four more sections. Section 2 reviews briefly the different types of
seasonality and various methods used to test and detect them. Section 3 describes
the tanker freight rate data, and their sources. Section 4 presents empirical results,
which identify the nature of seasonality, and measures and compares seasonal
patterns over sub-sectors of the industry and different market conditions. Section 5
discusses the forecasting performance of seasonal models and the final section
concludes.
2. Seasonality
A time series, measured more than once a year Že.g. at monthly, quarterly or
semi-annual intervals., is said to contain seasonal components when there are
systematic patterns in the series at the measured points Žseasons. within the year.
This may be due to changes in the weather, the calendar, or the behaviour of
agents involved in decision making. These systematic changes may or may not be
regular due to different circumstances in which factors such as technology, politics,
etc., can be influential. In shipping, freight rate seasonality may arise because of
factors that influence the demand for shipping services; that is, the demand for
international commodity transport. These are thought to be primarily the weather
conditions and calendar effects, such as the increase in heating oil consumption
during the winter, and increased demand for dry bulk commodities by Japan before
the change of financial year every March.
Seasonal behaviour of economic time series can take three forms: stochastic;
deterministic; or a combination of the two. A series with deterministic seasonality
has the same seasonal behaviour Žpeaks and troughs. every year; for instance
seasonal consumption of heating oil in the Northern Hemisphere, increases every
winter and declines every summer. In contrast a series with stochastic seasonality
follows a seasonal pattern, which changes over time; for example, summer peaks in
the series shift to winter and winter trough moves to summer.3 In addition, series
with stochastic seasonality retain the shocks for a long period, unlike deterministic
seasonal series in which shocks diminish relatively quickly.
It is important to distinguish between different types of seasonality in time series
analysis both from the econometric and the economic point of view. Failing to
recognise the existence of stochastic seasonality in time series may lead to spurious
regression results Žsee for example, Hylleberg et al., 1990., while taking account of
deterministic seasonality of time series may improve the explanatory power of
econometric models and result in better forecasts. From the economic point of
view, distinguishing between stochastic and deterministic seasonality would im-
prove the effectiveness of decisions and policies based on the seasonal behaviour of
the series. This is because if the pattern of seasonality changes over time Ži.e. if it is
stochastic ., then policies should be revised periodically.
2.1. Deterministic seasonality
The deterministic seasonal variations in a series can be investigated by regress-

ing the growth rate of the variable, ⌬ X t Žwhere X t is the natural logarithm of the
series., against a constant, ␤ 0 , and a set of seasonal dummy variables, as in Eq. Ž1.,
12
⌬ Xt s ␤0 q Ý ␤i Qi ,t q ␧ t Ž1.
is2
Where Q it , i s 2,...,12, are relative seasonal dummies,4 12 is the number of

periods the variable is measured over the year Ž12 is used here because of our
3
Hylleberg et al. Ž1990. document such behaviour in UK total and non-durables consumption as well
as public investment series. This is thought to be a result of changes in consumers’ tastes and spending
behaviour.
4
Relative seasonal dummies are constructed as Q i,t s Di,t y D 1,t , i s 2,...,12 where D 1,t ,..., D 12,t
are 0, 1 monthly dummies. In this case, the coefficient for the base month, January, can be
12
calculated as ␤ 1 s y Ý ␤i . The standard error of the January coefficient can be calculated
is2
from the estimated variance ᎐ covariance matrix of the coefficients as se Ž ␤ 1 . s
12 12 12 1r2
½Ýis2
Var Ž ␤i . q 2 Ý Ý CovŽ ␤i , ␤ j .
is2- js2
alternative restricted least squares procedure.
5 . See also Suits Ž1984. and Greene and Seaks Ž1991. for an
monthly data series, otherwise i s 2,3,4 for quarterly series., ␤i are the parameters
of interest and ␧ t is a white noise error term.5 The significance of each seasonal
dummy indicates the existence of deterministic seasonality in the respective period;
that is, that there is a significant change in the dependent variable compared to its
long-run mean, ␤ 0 .
2.2. Alternati¨ e models of deterministic seasonality under different market conditions
Canova and Ghysels Ž1994. argue that the magnitude of seasonality in a series
might not be constant over time. They find that the deterministic seasonal
coefficients in many macroeconomic variables depend on the prevailing market
conditions; that is, on the business cycle phase. This is an important issue in the
cyclical shipping freight markets since the elasticity of supply is thought to be high
during troughs and low in peaks of the shipping business cycle, as indicated by the
shape of the freight service supply curve in Fig. 1 Žsee Stopford, 1997; McConville,
1999, p. 109.. This is because at low freight rates the least efficient ships are laid up
and the fleet at sea is slow steaming. As market conditions improve, and freight
rates rise, the speed of the fleet increases and more and more ships are gradually
taken out of lay up. At very high levels of freight rates all vessels are active and the
fleet operates at full speed, creating a vertical supply curve. The demand for tanker
freight services is shown to be relatively inelastic as the proportion of the
transportation cost to the final value of the good is minimal ŽMcConville, 1999, p.
104.. As a result, changes in demand during the recovery period of the cycle
produce stronger reactions in rates compared to market downturns.
Fig. 1. The shipping freight market.
5
Alternatively, one can regress the growth rate of the series, ⌬ X t , on 12 seasonal dummies, Di,t
where i s 1,...,12. In such a case, the significance of a dummy coefficient indicates the average change
in the series in that particular month compared to the previous month.
To investigate empirically whether seasonal effects vary under different market

conditions, Eq. Ž1. is extended to the following two-state Markov Regime Switching
Seasonal regression ŽMRSS. model, which allows structural shifts in the behaviour
of the time series over the estimation period Žsee, e.g. Hamilton, 1989, 1994..
12
⌬ X t s ␤ 0,S t q Ý ␤i ,S Qi ,t q ␧ S ,t ,
t t
St s 1,2 Ž2.
is2
where St is an unobserved state variable, which determines the state of the market;
that is, expansion or contraction. Therefore, seasonal parameters in Eq. Ž2. depend
on the state of the market, St . The variable St follows a two-state first-order
Markovian process with fixed transition probabilities, see Appendix A for more
details.6 A comparison between the maximum likelihood estimates ŽMLE. of
parameters in Eq. Ž2., ␤i,1 and ␤i,2 , i s 0, . . . ,12, can give an indication of
differences in seasonal behaviour of freight rate series under different market
conditions.
A two-state MRSS model can be assumed as a combination of two linear models,
which describe changes in freight rates under two different market conditions.7
These two linear models are related through the regime probabilities, which can be
estimated by filtering the sample. The first model explains the seasonal behaviour
of freight rates when the market is in the contraction phase Žpoint A to B in Fig. 1.
while the second model explains the seasonal behaviour of freight rates when the
market is in the expansion phase Žpoint B to C in Fig. 1..
We also estimate and compare two restricted versions of the MRSS model of Eq.
Ž2..8 The first one in Eq. Ž3., known as the restricted MRSS model ŽRMRSS.,
assumes that seasonal changes under different market conditions Žexpansion or
contraction. follow the same pattern and differ only in magnitude; i.e. the same
seasonal coefficients are estimated under both market expansion and contraction.
In this case a state-dependent coefficient, ␥ S t , which takes a value of one when the
market is in expansion phase, is used to determine the magnitude of the reduction
in seasonal fluctuations of freight rates under poor market conditions.
12
⌬ X t s ␤ 0,S t q ␥ S t Ý ␤i Qi ,t q ␧S ,t ,t
St s 1,2 Ž3.
is2
6
More recent studies such as those of Diebold et al. Ž1994., Filardo Ž1994. relax the assumption of
fixed transition probabilities, modelling them as logistic functions or through other deterministic
variables. We do not pursue these models here as the large number of seasonal parameters would make
them difficult to converge.
7
Three and four-state MRSS models are also estimated to allow for more than two regimes in the
freight market. Results, which are not reported here, indicate that in the case of three- and four-state
MRSS models only two regimes are the prominent ones and other regimes are not significant. In
addition, since the number of parameters in the model increases with the number of regimes, parameter
estimates render inefficient and unreliable results.
8
We would like to thank the referee for suggesting this alternative MRS seasonal model.
The next model, which is the most restricted form of the MRSS specification, is
in fact a Segmented Random Walk ŽSRW. model. Mathematically
⌬ X t s ␤ 0,S t q ␧ S t ,t , S t s 1,2 Ž4.
This model assumes that there is no seasonal fluctuation in the series, but the
trend in the series depends on the prevailing market condition. Akaike, Hannan
and Quinn, and Schwarz Bayesian Information Criteria ŽAIC, HQC and SBIC. as
well as R 2 are used to select the best model in the sample period.9
2.3. Stochastic seasonality
An additional problem when testing for deterministic seasonality is that if the X t

series is Žseasonally. stochastic, then inferences are invalidated, see Franses et al.
Ž1995.. This suggests determining the stochastic properties of the series before
considering the issue of deterministic seasonality. Several procedures have been
proposed in the literature for testing the stochastic properties of seasonal Žperi-
odic. series; see for example, Dickey et al. Ž1984., Osborn et al. Ž1988., Hylleberg et
al. Ž1990.; Franses Ž1991.; Franses Ž1994.. The so-called HEGY ŽHylleberg et al.,
1990. approach seems to be the most promising. HEGY Ž1990. recognise that unit
roots in a periodic series may exist at more than one frequency.10 They propose a
procedure to test for the existence of unit roots at all possible frequencies, seasonal
and non-seasonal, for quarterly series.11 The intuition behind the HEGY test is to
filter the series from all possible unit roots except one and test for the significance
of that unit root. Then use another filter to separate a different set of unit roots
except one and test for the latter. This procedure is continued until the existence
9
Akaike Ž1969., Hannan and Quinn Ž1979., Schwarz Ž1978. information criteria are log-likelihood
based model selection criteria, defined as: AIC s LL y k, HQC s LL y lnŽlnŽ n..U k and SBIC s LL
y 0.5U kU lnŽ n.. Where LL, k and n represent the value of the log-likelihood, number of regressors and
number of observations, respectively. The choice between alternative models with any of these criteria is
based on selecting the model with the largest value of the criterion in question. These criteria are
designed to penalise the log-likelihood function for extra coefficients included in the model, and in that
respect take into account the desired property of parsimony Žin conjunction with goodness of fit. in
estimated models.
10
For time series that can be observed more than once a year Že.g. at weekly, monthly or quarterly.
the number of observations or data points within a year is called the periodicity of the data, denoted as
s Že.g. s s 12 for monthly data.. Correspondingly, a series with a periodicity equal to s may contain
Ž s y 1. seasonal cycles. Each cycle is associated with a seasonal frequency which can be denoted as
␣ s 2␲ jrs, j s 1,...,s y 1, and a zero frequency which is associated with no cycle.
11
A major problem with the other methods of testing seasonal unit roots, Dickey et al. Ž1984.,
Osborn et al. Ž1988., is that they do not recognise the possibility that unit roots may exist at different
frequencies Žpossibly more than one.. In modelling, this leads to over-differencing of the series, since
these test procedures require the series to be differenced twice at the zero frequency. Abeysinghe
Ž1994. outlines the problems of over-differencing and under-differencing. He argues that over-differenc-
ing can result in loss of important information regarding the relation among the variables, while under
differencing can lead to spurious regression results.
of all possible unit roots is tested for. Beaulieu and Miron Ž1993. extend the
HEGY Ž1990. method to monthly series, testing through the following equation.
12 12
Ž 1 y B 12 . X t s ⌬12 X t s ␣ 0 q ␤ 0 t q Ý ␤i Qi ,t q Ý ␲ j Yj,ty1
is2 js1
p
q Ý ␥ k ⌬12 X tyk q ␧ t Ž5.
ks1
where Yj,ty1 are different seasonal filters in the form of back-shift polynomials
defined in Appendix B, and ␲ j are the seasonal and non-seasonal unit root
coefficients. In Eq. Ž5., tests for the significance of ␲ j , j s 1,...,12, as proposed by
Beaulieu and Miron Ž1993., are equivalent to testing for seasonal unit roots at the
associated frequencies. Critical values are in Beaulieu and Miron Ž1993..
The null hypothesis of the existence of a unit root at each frequency is: Ho :
␲ j s 0, j s 1,...,12 for monthly data. The alternative of stationarity is H1: ␲ j - 0
for j s 1, 2; that is, zero and one cycle per year frequencies. The condition for a
unit root to exist for all other frequencies is, ␲ j s 0, for j s 2 and a joint F-test of
␲ jy1 s ␲ j s 0, for j s 4,6,8,10,12 . . . . It is possible to reject the existence of a
unit root at all frequencies other that zero, if ␲ j / 0, for j s 2. The joint F-test is
used because the pairs of complex roots cannot be distinguished and they always
operate together. Beaulieu and Miron Ž1993. produced and tabulated the critical
values for testing the significance of the parameters of interest for monthly data
with different combinations of intercept, trend and seasonal dummies.12
3. Tanker markets and freight rates
For analysis, the tanker sector is divided into four markets. The types of vessels
operating in these markets are: very large crude carriers ŽVLCC, 160 000 dwt and
over.; Suezmax Ž80 000᎐160 000 dwt.; Aframax Ž40 000᎐80 000 dwt.; and Handysize
Ž20 000᎐40 000 dwt.. The two larger size tankers are involved in crude oil
transportation. Aframax vessels are also involved in transportation of crude oil,
however, they contribute to oil product transportation to some extent. Handysize
tankers are mainly engaged in transportation of oil products,13 although they can
be employed in short haul crude oil transportation at times. The employment of
12
Other methods exist to test for monthly seasonal unit roots. Franses Ž1991. uses a similar approach
to Beaulieu and Miron Ž1993., with results which are equivalent to Beaulieu and Miron Ž1993.. In
another approach, proposed by Franses Ž1994. the seasonal series Žmonthly or quarterly. can be
decomposed into s Ž12 or 4. different annual series. Johansen’s multivariate approach is used then to
determine the existence of cointegrating vectors among the annual series. A problem with this approach
is that when the sample period is not long it is difficult to apply the test.
13
Handysize tankers involved in transportation of dirty petroleum products and small shipments of
crude oil are examined in this study.
Handysize tankers in clean product transportation is mainly due to the small parcel
size of petroleum products, which rarely exceed 60 000 tons.
Due to the limited number of petroleum export and import areas around the
world as well as draught and capacity restrictions in certain oil terminals, ports and
canals, operation of larger tankers is restricted to certain routes. For instance, the
maximum size of a loaded tanker that can go through the Suez Canal is approxi-
mately 160 000 dwt. The three major routes for VLCCs are from the Persian Gulf
to Ži. the Far East, Žii. North America and Žiii. north-west Europe via the Cape.
Suezmax tankers are mainly operating between the Persian Gulf and north-west
Europe through the Suez Canal as well as west Africa to the US Gulf and the US
east coast. The major routes for Aframax tankers are from west Africa and North
Sea to the US east coast, from north Africa to the Mediterranean and north
Europe, and from the Persian Gulf to the Far East. Handysize tankers are mainly
employed in regional ŽUS Gulf᎐US east coast, Persian Gulf, west Europe and the
Far East. dirty product transportation, however, they occasionally serve long haul
routes such as Middle East to Far East and Europe.
In the tanker sector, the size of the vessel determines the flexibility of operation
in terms of serving different routes, size cargoes and ports. Therefore, one would
expect smaller size tankers to be more flexible compared to larger ones in terms of
their commercial operation Žsee, for example, Kavussanos 1996a,b, 1998a,b..
Monthly spot freight rate indices for the four categories of tankers Žon world-
scale 14 basis. are obtained from the Institute of Shipping Economics and Logistics
ŽBremen. for the period January 1978᎐December 1996. These are constructed
from the Lloyds Ship Manager database. They are plotted in Fig. 2. It can be seen
that, while there are co-movements between the series in the long run, they behave
quite differently in the short run. The co-movement of the series in the long run is
because rates are driven by the aggregate demand for international oil transport.
Differences between the behaviour of freight rates in the short term emanate from
the specific factors affecting the trade in routes these different size tankers are
serving.
Table 1 presents descriptive statistics of the monthly series. Significantly negative
coefficients of excess kurtosis for VLCC and Suezmax spot rates indicate that the
distributions of these series have fat tails. The distributions of freight rates of
smaller vessels are mesokurtic though. Coefficients of skewness show VLCC and
14
Tanker voyage rates are based and reported on the Worldscale index. The index, shows the
break-even rate for a certain size tanker Žstandard vessel. in a particular route, normally a major route,
considering all the voyage costs and expenses. The rates for all other sizes are negotiated between the
brokers and charterers as a percentage of this break-even rate. The elements entering in the calculation
of the break-even rate such as costs, bunker prices, port dues, etc., are revised every year. Differential
tables also provide the differences to be charged for vessels employed in carrying cargoes between the
ports for which the WrS is not calculated. For example, if a 250 000 dwt tanker is hired to carry a cargo
from Kharg Island to a port in Malaysia, the WrS route, Kharg Island to Singapore, which is the
standard route will be charges plus the differential from Singapore to the Malaysian port. The offered
rate for the 250 000 dwt tanker is a percentage of the break-even rate for the loaded standard vessel,
which carry the cargo from Kharg Island to the Malaysian port.
Fig. 2. Monthly spot freight rates for different size tankers.

Table 1
Summary statistics of logarithmic tanker freight rates, sample: 1978:1᎐1996:12
VLCC Suezmax Aframax Handysize
Mean 3.69 4.35 4.76 5.12

S.D. 0.35 0.32 0.31 0.29
CV 9.55 7.32 6.48 5.69
Skewness 0.00 w0.986x y0.15 w0.369x 0.27 w0.096x 0.79 w0.000x
Kurtosis y0.66 w0.044x y1.09 w0.000x y0.38 w0.245x y0.40 w0.225x
ARCHŽ12. 50.34 w0.000x 110.33 w0.000x 97.90 w0.000x 108.78 w0.000x
L᎐BŽ12. 975.66 w0.000x 1365.62 w0.000x 1259.40 w0.000x 1216.77 w0.000x
J᎐B 4.18 w0.123x 12.05 w0.000x 4.19 w0.123x 24.53 w0.000x
Figures in w x are P-values.Coefficient of variation ŽCV. is a relative measure of risk, defined as the
standard deviation of a series over its mean value. ARCHŽ12. is the F-test for 12th order autoregressive
conditional heteroscedasticity. L᎐BŽ12. is the Ljung᎐Box Ž1978. test for 12th order autocorrelation. The
5% critical value for this statistic is 21.03.J᎐B is the Jarque᎐Bera normality test. The 5% critical value
for this statistic is 5.99.
Suezmax rates to be symmetrically distributed around their means. However,

significantly positive coefficients of skewness for Aframax and Handysize tankers
indicate that distributions for these series are skewed to the right. There seems to
be a positive relation between coefficients of variation and size; that is, freight
rates for larger tankers show higher variations than for smaller size ones.15
Statistics for ARCH, autocorrelation and normality tests for tanker freight rate
series, reported in the last three rows of the table, indicate that the log-levels of all
time series are heteroskedastic, autocorrelated and non-normal Žexcept for VLCC
and Aframax. at any conventional significance levels.
4. Estimation results
Following the Franses et al. Ž1995. suggestion on testing deterministic and

stochastic seasonality in a simultaneous framework, logarithmically transformed
data are used to estimate three different specifications of Eq. Ž5.: Ži. with intercept
only; Žii. with intercept and trend; Žiii. with intercept, trend and seasonal dummies.
The final results for the selected model on tanker freight rate series are in Table 2.
The lag structure and deterministic components of each equation is determined
using AIC, HQC and SBIC, while ensuring that there is no autocorrelation left in
the residuals. ARCH effects are not a problem as long as the ARCH coefficients
show stationarity Žsee Greene, 1997, p. 570.. Since deterministic terms are found
significant in most regression equations, inferences are based on regressions with
all the deterministic components present; that is, a constant, trend and seasonal
15
See Kavussanos Ž1996b, 1998a,b. for a formal analysis of time varying freight rate volatilities in the
tanker sector.
Table 2
Seasonal unit roots test results for monthly tanker freight rates, sample: 1978:1᎐1996:12
12 12 p
Ž1 y B12 . Xt s ⌬12 Xt s ␣0 q ␤ 0 t q Ý ␤i Qi,t q Ý ␲j Yj,ty1 q Ý ␥k ⌬12 Xtyk q ␧t Eq. Ž5.
is2 js1 ks1
Frequency VLCC Suezmax Aframax Handysize
␣0 2.68 2.49 2.45 2.42

␤0 2.01 1.91 1.50 0.85
0 ␲1 s 0 y2.72 y2.57 y2.56 y2.50
␲ ␲2 s 0 y4.11 y4.83 y3.97 y4.60
"␲r2 F3,4 ␲3 ,␲4 s 0 20.18 20.70 23.12 23.98
"2␲r3 F5,6 ␲5 ,␲6 s 0 20.24 22.26 17.09 14.46
"␲r3 F7,8 ␲7 ,␲8 s 0 16.54 18.72 20.21 22.30
"5␲r6 F9,10 ␲9 ,␲10 s 0 32.73 20.34 28.69 34.49
"␲r6 F11,12 ␲11 ,␲12 s 0 21.61 30.45 26.12 22.69
Lags of ⌬12 Xt 0 0 0 0
R2 0.77 0.86 0.87 0.87
DW 1.98 1.98 2.00 2.00
L᎐BŽ12. 3.94 w0.995x 4.76 w0.965x 5.19 w0.951x 5.50 w0.938x
ARCHŽ12. 1.69 w0.071x 1.66 w0.077x 5.18 w0.000x 0.78 w0.666x
White 0.00 w0.987x 0.532 w0.465x 8.21 w0.004x 10.3 w0.001x
J᎐B test 23.95 w0.000x 7.60 w0.022x 4.80 w0.090x 2.65 w0.266x
LL 76.086 162.932 155.605 171.636
AIC 51.086 137.632 130.605 146.636
HQC 33.872 120.586 113.559 129.591
SBIC 8.440 95.441 88.413 104.445
The regression includes a constant, a trend and seasonal dummies.LL, AIC, HQC and SBIC
represent log-likelihood, Akaike Ž1969., Hannan and Quinn Ž1979., Schwarz Ž1978. information criteria,
respectively, which are used to select the number of lagged dependent variables in each equation.
AIC s LL y k, HQC s LL y lnŽlnŽ n..U k, SBIC s LL y 0.5kU lnŽ n., where k and n represent the
number of regressors and observations, respectively. The model with the highest AIC, HQC and SBIC is
the most parsimonious model. Figures in w.x are P-values. DW is the Durbin᎐Watson test for first order
serial correlation. L᎐BŽ12. is the Ljung᎐Box test for 12th order serial correlation in the residuals.
ARCHŽ12. is the F-test for 12th order ARCH effects. White is the White Ž1980. test for heteroscedas-
ticity. J᎐B is the Jarque and Bera Ž1980. test for normality. The 5% critical value for this statistic is
␹ 2 Ž2. s 5.99.1, 2.5 and 5% critical values for the seasonal unit root test statistics are wSource: Beaulieu
and Miron Ž1993.x:1%: t Ž␲ 1. s y3.83, t Ž␲ 2. s y3.31, F s 5.25;2.5%: t Ž␲ 1. s y3.54, t Ž␲ 2. s y3.02,
F s 7.14;5%: t Ž␲ 1. s y3.28, t Ž␲ 2. s y2.75, F s 6.23.
dummies. Having obtained well-specified equations, seasonal unit root tests are
performed next as described earlier.
4.1. Stochastic seasonality
In seasonal unit root test equations, the F-statistics for ␲ i,iq1 s 0 Ž i s 3,5,7,9,11.,
testing for the joint existence of complex seasonal unit roots at the corresponding
frequencies Ž"␲r2, "2␲r3, "␲r3, "5␲r6, "␲r6., are rejected at the 5% level
of significance. The null hypothesis of unit root at the ␲ frequency, or six cycles
per year, is also rejected for all freight rate series.
Contrary to the above, tests for the existence of a unit root at zero Žlong run.
frequency, i.e. ␲ 1 s 0, point to there being a unit root at the zero frequency for all
the series examined.16 Therefore, it can be argued that the existence of stochastic
seasonality at all the seasonal frequencies is rejected for all sub-markets in the
tanker sector for the period 1978᎐1996. However, the existence of a unit root at
zero frequency could not be rejected for all the series indicating that freight rate
series are non-stationary of order one,17 I Ž1..
The existence of unit roots at zero frequency in tanker freight rate series
suggests that these series are serially correlated and consequently have a long
memory, which in turn implies that the effect of shocks to these series persist. As a
result, when modelling tanker freight rates in a univariate framework, ARIMA
models are appropriate, while modelling of rates in a multivariate framework
requires application of vector autoregression ŽVAR. techniques, which incor-
porates the degree of integration of these series.
4.2. Deterministic seasonality
Testing the existence of deterministic seasonality when stochastic seasonality is

not present through Eq. Ž5. will reduce the power of the test. This is due to the loss
of degrees of freedom in estimating the parameters of the seasonal unit roots.
Moreover, excluding seasonal filters from Eq. Ž5. in order to test only the
deterministic seasonality is not appropriate, since the dependent variable is the
12th difference of the series rather than the monthly growth rate of the series.
Therefore, the existence of deterministic seasonality in tanker sub-markets is
investigated through Eq. Ž1. for the period January 1978 to December 1996. The
results of the most parsimonious model in each sub-market of the tanker industry
are in Table 3. Diagnostic tests reveal that some equations have non-spherical
disturbances, in which case, the variance᎐covariance matrices are corrected for
heteroscedasticity andror serial correlation using White Ž1980. or Newey and West
Ž1987. estimates. In equations with significant ARCH effects it is found that these
are stationary. As a result Žsee Greene, 1997, p. 570. the unconditional variance of
the residuals is constant and OLS yield the BLUE.
Significance of a t statistic for ␤i , i s 1,2, . . . ,12, parameters Žmonths. is an
indication of a significant increase or decrease in monthly freight rate growth at a
16
It should be noted that seasonal unit root tests Žas well as DF and ADF tests. for monthly shipping
freight rates depend on the sample period examined. For example, using a short sample period may
reveal non-stationary series, however, testing over a longer sample which includes the whole business
cycle may reverse the result.
17
The results are also confirmed by the Franses and Hobijn Ž1997. seasonal unit root test. This test
uses a similar approach as HEGY Ž1990. and only differs from HEGY Ž1990. in the method used for
linearising the seasonal back shift polynomial. Also ordinary unit root tests such as DF, ADF and
Philips᎐Perron tests confirm that series are non-stationary in the levels, but are stationary in
logarithmic first differences. The results are available from the authors on request.
Table 3
Deterministic seasonality in tanker freight rate series; Sample: 1978:1᎐1996:12
12
⌬ Xt s ␤0 q ⌺ ␤i Qi,t q ␧ t Eq. Ž1.
is2
Month Coef VLCC Suezmax Aframax Handysize
Const. ␤0 0.004 Ž0.350. 0.004 Ž0.443. 0.003 Ž0.347. 0.002 Ž0.239.
Jan. ␤1 I0.110 (I2.933)

Feb. ␤2 I0.067 (I1.695) I0.049 (I2.034) I0.030 (I1.900)
Mar. ␤3
Apr. ␤4 I0.048 (I2.056) I0.041 (I2.662) I0.059 (I2.701)
May ␤5
June ␤6 0.105 (2.951)
July ␤7 I0.052 (I3.068)
Aug. ␤8
Sept. ␤9
Oct. ␤10
Nov. ␤11 0.066 (1.847) 0.105 (4.321) 0.110 (4.725) 0.077 (4.894)
Dec. ␤12 0.033 (1.832)
R2 0.059 0.074 0.084 0.048

L᎐BŽ1. 1.464 w0.226x 0.915 w0.339x 1.702 w0.192x 2.516 w0.113x
L᎐BŽ12. 24.44 w0.017x 10.43 w0.578x 17.60 w0.128x 16.82 w0.156x
ARCHŽ12. 1.039 w0.413x 1.774 w0.054x 1.857 w0.042x 1.264 w0.242x
White 0.463 w0.496x 0.121 w0.728x 0.008 w0.929x 0.812 w0.367x
J᎐B 20.58 w0.000x 18.00 w0.000x 46.54 w0.000x 74.59 w0.000x
LL 53.461 152.513 142.009 160.615
AIC 56.870 155.240 146.100 162.660
HQC 53.461 152.513 142.009 160.615
SBIC 48.432 148.489 135.974 157.597
See notes in Table 2. t-statistics in brackets are corrected for heteroscedasticity and serial
correlation using the Newey᎐West method where appropriate.The coefficient for January dummies, ␤ 1 ,
are calculated as ␤ 1 s yŽ ␤ 2 q ...q ␤ 12 .. Standard errors for January dummies are calculated from the
variance᎐covariance matrix of the coefficients, see footnote 4 in the text for details.Figures in bold
represent significant coefficients.
particular month compared to the average over the sample period. The results
indicate that freight rates in all size tankers experience a significant increase in
November compared to the average monthly growth rate of zero Ž ␤ 0 s 0. over the
period. This increase is 6.6% for VLCCs, 10.5% for Suezmax, 11.0% for Aframax,
7.7% for Handysize rates. The increase in freight rates in early winter ŽNovember.
is due to the increase in demand for oil by oil-importing countries Žcompanies.,
which are in the process of building up sufficient inventory levels Žcrude oil. for
winter.18 Aframax spot rates continue to rise in December by 3.3% due to the
18
The coldest winter months are usually January and February; so excess demand for crude oil is
generated sometime in November to give enough lead time for crude to be transported and refined
Žfrom the long haul, Middle East routes., which can take 6᎐8 weeks.
increase in demand for small shipments, usually from short haul routes Žsuch as
from Venezuela and Mexico to the US., to satisfy any remaining inventory
requirements for the winter months.
In January, VLCC rates decrease significantly by 11.0% because of the decline
in the need for inventory building using large vessels after the cold season in the
Northern Hemisphere. This decline in demand continues and results in a further
6.7% drop in VLCC rates in February. The February dummy shows a significant
4.9% drop in both Suezmax and 3.0% in Aframax rates. During April, Suezmax,
Aframax and Handysize rates decline even further by 4.8, 4.1 and 5.9%, respec-
tively; this can be linked to the decline in the level of petroleum imports and trade
activities during the spring months, and the routine maintenance program of
refineries around the US Gulf and the Far East which takes place during this
period. VLCC rates show a significant rise of 10.5% in June. This is due to
inventory building that takes place after the end of routine maintenance programs
of refineries and terminals during April and May, increase in Japanese imports,
and to stock up for the US driving season taking place from mid-July to the end of
August. A decline of 5.2% in Aframax freight rates is observed in July. This is
thought to be a result of the decline in demand for those vessels operating in the
Mediterranean as well as annual maintenance in the North Sea terminals, which
use primarily Aframax tankers.
The overall variations of tanker freight rates explained purely by seasonal factors
are measured by the adjusted coefficients of determination, R 2 . These are 5.9, 7.4,
8.4 and 4.8% for VLCC, Suezmax, Aframax and Handysize, respectively.
4.3. Seasonality patterns under different market conditions
To allow for different seasonality effects under expansionary and contractionary

periods in freight markets, MRSS models corresponding to Eqs. Ž2. ᎐ Ž4. are
estimated and presented in Tables 4᎐6. For example, estimation results from the
most parsimonious MRSS model of Eq. Ž2. are presented in Table 4. Under each
size category, two columns are designated as ‘Expansion’ and ‘Contraction’, distin-
guishing between expansion and contraction periods, respectively. Constant terms
in the regressions represent the average monthly growth or decline in rates over
the estimation period, under different market conditions. Comparison of the
results of other coefficients shows that seasonal fluctuations in rates during market
recoveries, when supply is inelastic, are stronger compared to market downturns
when the supply schedule is thought to be elastic. This can be seen, for instance, in
the case of Handysize rates; they show significant declines of 6.5 and 12.7% in
February and April, respectively, in expansionary markets, but no significant
change in weak markets. A similar situation is observed when demand rises
seasonally in November and December; that is, rates rise by 13.8 and 6.8% in these
2 months, when the market is strong, but show no significant rise when markets are
weak.
Differences in seasonal coefficients under different market conditions are also
evident in the Aframax sector. The pre-winter rise in Aframax rates is 9.4, 31.3 and
762
Table 4
Estimates of Markov Regime Switching Seasonal Ž MRSS. model for variations in spot rates under different market conditions Žexpansion and contraction ., Sample:
1978:1 to 1996:12
12
M.G. Ka¨ ussanos, A.H. Alizadeh-M r Economic Modelling 19 (2002) 747᎐782

1
Ž expansion .
⌬ X t s ␤ 0,S t q ⌺ ␤ i,S t Q i,t q ␧ S t,t ,
is 2
St s ½
2 Ž contraction .
Eq. Ž2 .
Pr ŽSt s 1 <Sty1 s 2 . s P 21 , Pr ŽSt s 2 <Sty1 s 2 . s P 22 s Ž1 y P 21 .

Expansion Contraction Expansion Contraction Expansion Contraction Expansion Contraction
Ž ␤ i,1 . Ž ␤ i,2 . Ž ␤ i,1 . Ž ␤ i,2 . Ž ␤ i,1 . Ž ␤ i,2 . Ž ␤ i,1 . Ž ␤ i,2 .
Const. 0.028 y0.012 0.012 0.0005 0.005 0.003 0.005 y0.0001

( 2.605 ) Žy0.530 . Ž0.696 . Ž0.070 . Ž0.340 . Ž0.570 . Ž0.450 . Žy0.032 .
Jan. I0.201 I0.260 0.070
( I3.956 ) ( I4.523 ) ( 3.134 )
Feb. I0.069 I0.121 I0.075 I0.065
( I2.221 ) ( I2.381 ) ( I2.191 ) ( I1.681 )
Mar. I0.047 I0.062
( I2.588 ) ( I3.552 )
Apr. I0.148 I0.149 I0.127
(I2.698 ) (I3.421 ) (I5.759 )
May 0.138 0.104
( 2.543 ) ( 1.783 )
June I0.069 0.201
( I2.697 ) ( 3.956 )
July 0.154 I0.053 I0.112 I0.040
( 5.407 ) ( I1.716 ) ( I3.338 ) ( I2.250 )
Aug. 0.116
( 4.192 )
Sept.
Oct. I0.106 0.094

( I3.759 ) ( 2.346 )
No¨ . 0.218 0.041 0.313 0.032 0.138
( 5.427 ) ( 2.344 ) ( 6.590 ) ( 2.158 ) ( 2.732 )
Table 4 Ž Continued .
12
1
Ž expansion .
⌬ X t s ␤ 0,S t q ⌺ ␤ i,S t Q i,t q ␧ S t,t , St s ½ Eq. Ž2 .

is 2 2 Ž contraction .
Expansion Contraction Expansion Contraction Expansion Contraction Expansion Contraction
Ž ␤ i,1 . Ž ␤ i,2 . Ž ␤ i,1 . Ž ␤ i,2 . Ž ␤ i,1 . Ž ␤ i,2 . Ž ␤ i,1 . Ž ␤ i,2 .
Dec. 0.084 0.068

( 2.208 ) ( 2.063 )
P 12 0.149 Ž2.224 . 0.041 Ž2.465 . 0.026 Ž1.403 . 0.016 Ž1.068 .

P 21 0.201 Ž2.549 . 0.086 Ž2.196 . 0.080 Ž1.531 . 0.020 Ž1.743 .
␴1 0.070 Ž7.245 . 0.069 Ž13.43 . 0.087 Ž17.14 . 0.076 Ž12.74 .
␴2 0.220 Ž14.88 . 0.158 Ž13.03 . 1.140 Ž16.87 . 0.137 Ž17.82 .
R2 0.214 0.241 0.413 0.147

L ᎐B Ž1 . 2.988 w0.084 x 1.155 w0.282 x 2.070 w0.100 x 5.254 w0.022 x
L ᎐B Ž12 . 18.98 w0.089 x 9.749 w0.638 x 16.28 w0.178 x 21.15 w0.048 x
ARCH Ž12 . 1.041 w0.413 x 1.590 w0.097 x 1.484 w0.132 x 1.855 w0.042 x
White 0.024 w0.877 x 1.105 w0.293 x 3.646 w0.056 x 1.600 w0.206 x
J᎐B 63.29 w0.000 x 43.93 w0.000 x 1.445 w0.486 x 59.96 w0.000 x
LL 90.581 193.07 189.01 184.18
AIC 77.581 180.070 171.010 174.180
HQC 68.717 171.206 158.737 167.362
SBIC 55.642 158.131 140.632 157.304
See notes in Tables 2 and 3. t-statistics in brackets are corrected for heteroscedasticity and serial correlation using the Newey᎐West method where
appropriate.The coefficient for January dummies, ␤ 1, are calculated as ␤ 1 s y Ž ␤ 2 q ...q ␤ 12 .. Standard errors for January dummies are calculated from the
variance᎐covariance matrix of the coefficients, see footnote 4 in the text for details.Figures in bold represent significant coefficients. ␤ i,1 and ␤ i,2 refer to coefficient
estimates under expansionary Žstate 1 . and contractionary Žstate 2 . periods, respectively. P12 , P 21 are regime switching probabilities, and ␴ 1, ␴ 2 are standard errors of
regression for each regime.
763
8.4% in October, November and December during market expansions as opposed

to a 3.2 and 7.0% rise in November and January in weak markets. The after winter
decline in Aframax rates during market recoveries is estimated to be 26.0, 7.5 and
14.9% in January, February and April, respectively. The decline in Aframax rates
in the post winter periods is reduced to 6.2% and takes place only in March during
market downturns. There is also a 10.4% rise in Aframax rates in May and an
11.2% decline in July, before and after the US driving season. The July decline in
Aframax rates reduces to 4.0% in the same month in market downturns.19
Suezmax seasonal movements of freight rates are very similar to those of
Aframax tankers. This is expected since these two size tankers are close substitutes
in many routes and trades Že.g. West Africa and North Sea to US Gulf and US east
coast.. During market expansions, Suezmax rates show a pre-winter rise of 21.8%
in November as opposed to a rise of only 4.1% in the same month when markets
are weak. The after-winter drop in Suezmax rates is found to be 12.1 and 14.8% in
February and April, respectively, when the market is in recovery. During market
recessions this decline is reduced to 4.7% in March. Similar to Aframax, Suezmax
rates also show a rise of 13.8% in May and a drop of 5.3% in July during a
recovery, but no change in market troughs.
In contrast to results for smaller size tankers, the MRSS model results for
VLCCs are not as consistent. This may be due to the high volatility of VLCC rates
compared to smaller size tankers, which when coupled with the large number of
parameters in the seasonal Markov Switching model makes convergence to the
global maximum difficult. Thus, we do not get the expected pre-winter rise in rates,
as in other sizes, and the results are peculiar. However, adjusted R 2 values for all
MRSS models show higher values compared to the deterministic seasonal models
of Table 3. These are 0.214, 0.241, 0.413 and 0.147 for VLCC, Suezmax, Aframax
and Handysize regressions, respectively. These are increases of three to four times
in comparison to Eq. Ž1. estimates.
Results of the most parsimonious RMRSS models of Eq. Ž3. are in Table 5.
Coefficients of ␥ S t in each equation represent the amount by which seasonal
coefficients should be multiplied with to yield the seasonal effect of the respective
month under a market downturn. In that respect seasonal coefficients are not
allowed to change in magnitude separately for each month between market
conditions, i.e. the pattern of seasonality remains the same between market
conditions. This is more restrictive in comparison to the MRSS of model 4. ␥ S t is
set equal to one across models, when the market is in the expansionary phase. The
fact that these coefficients are insignificant implies that there is no seasonal
variation in tanker freight rates during market troughs, while there are sharp
fluctuations in freight rates during periods of market recovery. The patterns of
seasonality for each size during the market recovery are similar to those from the
19
As mentioned earlier, changes in demand for freight services takes place 4᎐6 weeks prior to the
actual increase or decrease in demand for petrol due to the time needed for transportation and refining.
Table 5
Estimates of the Restricted Markov Regime Switching model for seasonality ŽRMRSS. Sample: 1978:1 to 1996:12

12 ␥St s 1 Ž expansion .
⌬ Xt s ␤0,S t q ␥St ⌺ ␤i Qi,t q ␧S t,t ,
is2
PrŽSt s 1 <Sty1 s 2. s P21 ,
½
␥St s ␥St Ž contraction .
Eq. Ž3.
PrŽSt s 2 <Sty1 s 2. s P22 s Ž1 y P21 .

PrŽSt s 2 <Sty1 s 1. s P12 , PrŽSt s 1 <Sty1 s 1. s P11 s Ž1 y P12 .
␥St y0.254 Žy0.719. 0.104 Ž1.391. 0.032 Ž0.587. 0.046 Ž0.322.

Cons. 0.012 Ž1.317. 0.011 Ž0.643. y0.001 Žy0.075. 0.005 Ž0.407.
Jan. I0.143 (3.130) I0.165 (I2.058)
Feb. I0.118 (I3.882) I0.119 (I2.969) I0.094 (I1.943) I0.064 (I2.112)
Mar.
Apr. I0.128 (I2.543) I0.180 (I2.639) I0.122 (I4.228)
May. 0.104 (1.712) 0.130 (2.276)
June
July 0.091 (2.158) I0.063 (I1.830) I0.151 (I3.643)
Aug. 0.120 (5.351)
Sept.
Oct. 0.116 (3.668)
No¨ . 0.050 (1.722) 0.235 (3.850) 0.345 (6.668) 0.138 (3.849)
Dec. 0.119 (3.727) 0.070 (2.528)
P12 0.102 Ž2.527. 0.048 Ž2.062. 0.015 Ž1.279. 0.016 Ž0.996.

P21 0.259 Ž3.293. 0.088 Ž2.145. 0.065 Ž1.384. 0.021 Ž1.405.
␴1 0.116 Ž11.05. 0.071 Ž14.68. 0.095 Ž17.85. 0.076 Ž11.96.
␴2 0.282 Ž9.563. 0.158 Ž11.14. 0.140 Ž9.040. 0.137 Ž17.82.
765
766
Table 5 Ž Continued.
12 ␥St s 1
Ž expansion .
⌬ Xt s ␤0,S t q ␥St ⌺ ␤i Qi,t q ␧S t,t ,
is2
PrŽSt s 1 <Sty1 s 2. s P21 ,
½
␥St s ␥St Ž contraction .
Eq. Ž3.
PrŽSt s 2 <Sty1 s 2. s P22 s Ž1 y P21 .

PrŽSt s 2 <Sty1 s 1. s P12 , PrŽSt s 1 <Sty1 s 1. s P11 s Ž1 y P12 .
R2 0.132 0.217 0.369 0.145

L᎐B Ž1. 2.502 w0.114x 1.701 w0.192x 2.926 w0.087x 5.217 w0.022x
L᎐B Ž12. 23.87 w0.021x 9.503 w0.659x 14.05 w0.297x 21.03 w0.050x
ARCH Ž12. 1.193 w0.290x 1.562 w0.105x 0.958 w0.489x 1.839 w0.044x
WIHTE 2.087 w0.149x 1.603 w0.205x 2.502 w0.114x 1.302 w0.253x
J᎐B 74.66 w0.000x 37.07 w0.000x 0.157 w0.924x 59.62 w0.000x
LL 81.63 189.62 181.19 184.23
AIC 70.630 178.620 167.190 174.230
HQC 63.130 171.120 157.645 167.412
SBIC 52.066 160.056 143.563 157.354
See notes in Tables 2 and 3. t-statistics in brackets are corrected for heteroscedasticity and serial correlation using the Newey᎐West method where
appropriate. The coefficient for January dummies, ␤ 1 , are calculated as ␤ 1 s yŽ ␤ 2 q ...q ␤ 12 .. Standard errors for January dummies are calculated from
the variance᎐covariance matrix of the coefficients, see footnote 4 in the text for details. Figures in bold represent significant coefficients.
Table 6
Estimates of the Markov Regime Switching Segmented Random Walk model ŽSRW . Sample: 1978:1᎐1996:12
S t s 1 Ž expansion .
⌬ X t s ␤ 0,S t q ␧ St,t ,
½ S t s 2 Ž contraction .
Eq. Ž4 .

␤ 0,1 0.019 Ž1.558 . 0.011 Ž0.479 . 0.004 Ž0.551 . 0.004 Ž0.273 .

␤ 0,2 y0.014 Žy0.450 . y0.0006 Žy0.079 . y0.002 Žy0.063 . y0.0004 Žy0.047 .
P 12 0.113 Ž1.395 . 0.049 Ž1.847 . 0.008 Ž0.595 . 0.018 Ž0.879 .

P 21 0.155 Ž2.067 . 0.087 Ž1.943 . 0.042 Ž0.846 . 0.021 Ž1.294 .
␴1 0.115 Ž9.618 . 0.072 Ž12.63 . 0.099 Ž14.48 . 0.075 Ž11.21 .
␴2 0.257 Ž9.243 . 0.181 Ž9.890 . 0.216 Ž9.387 . 0.149 Ž16.45 .
R2 Na Na Na Na
L ᎐B Ž1 . 2.502 w0.114 x 0.382 w0.535 x 0.316 w0.574 x 1.200 w0.273 x
L ᎐B Ž12 . 23.87 w0.021 x 13.19 w0.355 x 20.19 w0.063 x 19.24 w0.083 x
ARCH Ž12 . 1.193 w0.290 x 2.161 w0.015 x 4.229 w0.000 x 1.495 w0.128 x
White 2.087 w0.149 x 93.27 w0.000 x 53.94 w0.000 x 23.27 w0.000 x
J᎐B 74.66 w0.000 x 20.32 w0.000 x 71.45 w0.000 x 139.1 w0.000 x
LL 68.21 176.85 163.57 174.20
AIC 62.210 170.850 157.570 168.200
HQC 58.119 166.759 153.479 164.109
SBIC 52.084 160.724 147.444 158.074
The regression includes a constant, a trend and seasonal dummies.LL, AIC, HQC and SBIC represent log-likelihood, Akaike Ž1969 ., Hannan and Quinn Ž1979 .,
Schwarz Ž1978 . information criteria, respectively, which are used to select the number of lagged dependent variable in each equation. AIC s LL y k, HQC s LL y
ln Žln Ž n ..U k, SBIC s LL y 0.5k U ln Ž n ., where k and n represent number of regressors and observations, respectively. The model with the highest AIC, HQC and SBIC
is the most parsimonious model. Figures in w.x are P-values.DW is the Durbin ᎐Watson test for first order serial correlation.L ᎐B Ž12 . is the Ljung᎐Box test for 12th
order serial correlation in the residuals. ARCH Ž12 . is the F-test for 12th order ARCH effects. White is the White Ž1980 . test for heteroscedasticity.J ᎐B is the Jarque
and Bera Ž1980 . test for normality. The 5% critical value for this statistic is ␹ 2 Ž2 . s 5.99.1, 2.5 and 5% critical values for the seasonal unit root test statistics are
wSource: Beaulieu and Miron Ž1993 .x :1%: t Ž␲ 1 . s y3.83, t Ž␲ 2 . s y3.31, F s 5.25;2.5%: t Ž␲ 1 . s y3.54, t Ž␲ 2 . s y3.02, F s 7.14;5%: t Ž␲ 1 . s y3.28, t Ž␲ 2 . s
y2.75, F s 6.23. t-statistics in brackets are corrected for heteroscedasticity and serial correlation using the Newey᎐West method where appropriate. The coefficient
for January dummies, ␤ 1, are calculated as ␤ 1 s y Ž ␤ 2 q ...q ␤ 12 .. Standard errors for January dummies are calculated from the variance᎐covariance matrix of the
767
coefficients, see footnote 4 in the text for details.Figures in bold represent significant coefficients.
unrestricted MRSS model; that is, freight rates increase during the winter months
and decline during the spring and summer months. For example, significant
coefficients of January and February dummies in the VLCC model indicate 14.3
and 11.8% drop in VLCC rates in respective months when the market is in the
recovery stage. Also, positive and significant July, August and November coeffi-
cients show 9.1, 12 and 5% rise in VLCC rates, respectively, under a market
recovery.
Investigating the seasonal behaviour of Suezmax and Aframax freight rates using
the RMRSS model reveals similar seasonal patterns as in the case of the unre-
stricted MRSS models when the market is in the expansionary phase. Results for
Handysize rates are almost identical to those of the MRSS model. This is because
in both models it is found that there is no seasonality for Handysize vessels during
recession periods. This makes sense, given that these smaller size vessels can switch
between routes and trades in bad market conditions, when freight rates are low.
However, during tight market situations, the rates of these vessels are also affected,
as they are called to service to fill the seasonal capacity gap that riddles across
segments of the tanker industry.
Table 6 reports the results from an even more restricted Markov Regime
Switching model, which contains no seasonal elements. In this Segmented Random
Walk model ŽSRW. of Eq. Ž4. the growth rate of the series is allowed to be
different under different market conditions. It is used as a benchmark model to
compare the rest. Results indicate that the standard deviation of freight rates
under tight market conditions, ␴ 2 , is larger than the standard deviation of the rates
when weak market conditions prevail, ␴ 1 , in line with evidence on freight markets
Žsee Kavussanos, 1996b.. However, there seems to be no significant difference
between the mean growth rates of freight rates under different market conditions.
Comparison of AIC, HQC and R 2 across different models; i.e. SSDV, MRSS,
RMRSS and SRW models, for each size vessel show that the unrestricted MRSS
model fits the data better in every case, where models with higher values of AIC
and HQC are preferable. The results from using the SBIC are clear in rejecting
SSDV in every case, but not as clear in their choice of the best model; MRSS is
selected for VLCC, SRW for Suezmax and Aframax, and RMRSS for Handysize.
However, based on the AIC and the HQC, the R 2 and also the additional
economic information observed from the varying estimated coefficients for each
season by market state, the MRSS model seems to perform best.20 That is, based
on statistical criteria the MRSS model is preferable, which when coupled with our
economic knowledge of freight markets Žsee p. 6 and Fig. 1. reinforce our choice of
MRSS as the best model.
A little further discussion is due on the results of the selected MRSS models of
Eq. Ž2.. Estimated P12 and P21 values reported for each model, in Table 5, show
20
In addition, since the likelihood function in MRS models has a mixture distribution, and the fact
that the estimated log-likelihood for models is not the global maximum log-likelihood Žsee Hamilton,
1994, p. 689., we believe that applying maximum penalty to the estimated log-likelihood for inclusion of
regressors, as in the case of SBIC, might not be appropriate.
the probability of change in the state of the market from expansionary to contrac-
tionary and vice-versa, respectively. The duration of a market expansion or reces-
sion for each tanker sector can be calculated as 1rP12 and 1rP21. Results indicate
that in the Suezmax sector the average duration of expansion and recession periods
in this market are 24 and 12 months, respectively. In the Aframax market, the
average duration of expansion and recession periods are 38 and 13 months,
respectively. The average duration of expansion and recession periods in the
Handysize market are 62 and 50 months, respectively. The transition probability
values for VLCC rates suggest an expansionary period of 7 months and a recession-
ary period of approximately 5 months, which indicate that the whole cycle in this
market may last 1 year. The fact that the cycles in the VLCC market are shorter
compared to the other tanker sub-markets may be attributed to the domination of
seasonal cycles in this market over the cyclical variations and the higher volatility
levels in this market compared to markets for smaller tankers. The combination of
these two effects makes it more difficult to disentangle seasonal and cyclical
variations in the market for VLCCs.21
In general, the results suggest that; first, expansionary periods in the tanker
freight markets last longer compared to contractionary periods. This may be
because additions to the stock of the fleet, through new buildings in the expansion-
ary periods, take longer in comparison to deletions, which take place through the
much faster process of scrapping during contractionary periods. Second, freight
rates for larger tankers show more cyclical changes Žboth expansionary and
contractionary. compared to smaller tankers; a result which is in line with the
argument of positive relation between vessel size and freight rate volatilities in
tanker freight markets Žsee Kavussanos 1996b, 1998a,b..
Fig. 3 is used to illustrate how the Markov Regime Switching model is applied to
derive results under different market conditions for Handysize rates. Panel A plots
the log of the Handysize spot rate. It forms the basis upon which to distinguish
between expansionary and contractionary conditions in the freight market. Such
regime probabilities over the estimation period are shown in panel B. When the
market is in expansionary phases regime Žstate. probabilities are close to zero,
while when the market is in contractionary phases state probabilities tend to one.22
It can be seen that periods of market expansion are identified correctly by the
model to be 1978:6᎐1981:6 and 1986:2᎐1992:6, while recession periods are
1981:6᎐1986:1 and 1992:6᎐1994:12. Panel C compares the actual charges in freight
rates with the fitted seasonal changes, the latter tracking well the former ones.
Panel D shows the seasonal fluctuations in freight rates based on the MRSS model,
utilising the regime switching probabilities of panel B; clearly, the magnitude of
seasonal changes in freight vary according to the state of the market, confirming
visually the numerical results of Table 5.
In general, the results for the tanker sector suggest that, seasonality in freight
21
We would like to thank an anonymous referee for pointing this out.
22
Details of how the Markov Regime Switching model estimates the regime switching probabilities
are in Appendix A.
770
Fig. 3. Markov Regime Switching Model for Handysize spot rates. Panels: Ža. log-level of Handysize spot rates; Žb. regime probabilities determining
market being in a particular state; Žc. seasonal changes of freight rates under different market conditions; and Žd. fitted and actual changes in Handysize
freight rates.
Fig. 3. Ž Continued..
rates is deterministic rather than stochastic and is quite different across the size of
vessels and under different market conditions. More specifically: Ž1. the levels of
freight rates for different size tankers increase during November and December
and drop after January; Ž2. precise seasonal patterns are related to size; Ž3.
seasonal movements are found to be asymmetric under different market condi-
tions; that is, seasonal variations are more pronounced during market expansions
compared to market contractions, which is in line with the expected low and high
elasticities of the supply for freight services under the respective market conditions.
5. Forecasting performance
The aim of the analysis so far has been to understand and measure seasonality
patterns in different segments of the tanker sector. A useful exercise for business
decisions is to consider the possibility of forecasting seasonality using a particular
model. This may not be the same model as the one used so far to understand
seasonality patterns. This section considers the out-of-sample forecasting perfor-
mance of competing models ŽSSDV, SRW, MRSS and RMRSS. for each sub-sector
by using the most parsimonious specification of each model to produce recursive 23
multiple step ahead forecasts over the period January 1997᎐December 1998.
Results of R.M.S.E. values for forecasts for 1᎐6, 9 and 12 months ahead are
reported in Table 7, and the Diebold and Mariano Ž1995. test is used to compare
the forecasting performance of models.
While forecasting changes in tanker freight rates at time t q m using the
standard seasonal model of Eq. Ž1. is straightforward, forecasting with MRS
models of Eqs. Ž2. ᎐ Ž4. requires determination of regime probabilities at time
t q m Žsee for example, Engle, 1994 and Marsh, 2000. prior to forecasting changes
in freight rates at t q m. Therefore, in order to use the MRS models to forecast
changes in tanker freight rates at time t q m, estimates of the transition matrix, P,ˆ
pŽ st s 1. and ˆ
and the filtered regime probabilities at time t, ˆ pŽ st s 2., are used to
predict regime probabilities; i.e. probabilities of the state variable, Stqm at time
t q m; that is, ˆ
pŽ stqm s 1. and ˆpŽ stqm s 2..
m
ˆp11 ˆp12
p Ž stqm s 1 . ˆ
p Ž stqm s 2 .. s Ž ˆ
p Ž st s 1. ˆ
p Ž st s 2 ..
Žˆ
ˆp 21ž ˆp 22 / Ž6.
Once regime probabilities at time t q m are determined, forecasts of changes in
23
Recursive forecasts are made by first estimating each model over the sample period ŽJanuary 1978
to December 1996. and forecasting the series 1᎐24 steps ahead; that is, January 1997 to December
1998. Next, the estimation period is increased by one observation to cover the period January 1978 to
January 1997 and forecasting the series 1᎐23 steps ahead; that is, February 1997 to December 1998.
This process is repeated until the estimation period covered the period January 1978 to November 1998
and 1 step ahead forecast for December 1998 is obtained. In this way, 24 observations for 1-step ahead
forecasts, 23 observations for 2-step ahead forecasts, and so on, are obtained which are then used to
calculate the R.M.S.E. values for 1᎐12 steps ahead forecasts.
Table 7
Comparison of forecasting performance of different seasonal models in forecasting changes in freight rates for different size tankers
Handysize Aframax
N SSDV SRW RMRSS MRSS SSDV SRW RMRSS MRSS

1-Month SSDV 24 0.0793 0.1116
ahead SRW 1.0573U 0.0838 0.9107UU 0.1016
RMRSS 0.9923 0.9386UU 0.0787 0.9166UU 1.0064 0.1023
MRSS 1.0148 0.9598UU 1.0226UU 0.0805 0.8773UU 0.9634 0.9572 0.0979
2-Month SSDV 23 0.0824 0.1106
ahead SRW 1.0420U 0.0858 0.9197UU 0.1018
RMRSS 1.0237 0.9825 0.0843 0.9212UU 1.0016 0.1019
MRSS 1.0389 0.9971 1.0149U 0.0856 0.9166UU 0.9966 0.9950 0.1014
3-Month SSDV 22 0.0835 0.1131
ahead SRW 1.0425U 0.0871 0.9182UU 0.1038
RMRSS 0.9968 0.9562UU 0.0832 0.9222 UU 1.0043 0.1043
MRSS 1.0074 0.9663UU 1.0106 0.0841 0.9225UU 1.0047 1.0004 0.1043
4-Month SSDV 21 0.0851 0.1151
ahead SRW 1.0459U 0.0891 0.9166UU 0.1055
RMRSS 0.9951 0.9515UU 0.0847 0.9211UU 1.0050 0.1060
MRSS 1.0051 0.9610UU 1.0100 0.0856 0.9326UU 1.0175 1.0125 0.1074
5-Month SSDV 20 0.0872 0.0980
ahead SRW 1.0435 0.0909 0.9436 0.0925
RMRSS 1.0053 0.9633U 0.0876 0.9373 0.9933 0.0919
MRSS 1.0174 0.9750 1.0121UU 0.0887 0.9526 1.0095 1.0163 0.0934
6-Month SSDV 19 0.0880 0.0977
ahead SRW 1.0442 0.0918 0.9384 0.0917
RMRSS 1.0013 0.9589U 0.0881 0.9345 0.9959 0.0913
MRSS 1.0104 0.9676 1.0090UU 0.0889 0.9480 1.0103 1.0145 0.0926
9-Month SSDV 16 0.0877 0.1046
ahead SRW 1.0505 0.0921 0.9255 0.0968
RMRSS 0.9885 0.9410 0.0866 0.9226 0.9969 0.0965
MRSS 0.9924 0.9447 1.0040 0.0870 0.9631 1.0406 1.0439 0.1007
12-Month SSDV 13 0.0913 0.1135
1.0856UU
773
ahead SRW 0.0991 0.9019 0.1023
RMRSS 1.0071 0.9277 0.0919 0.9047 1.0031 0.1026
MRSS 1.0177 0.9375 1.0106U 0.0929 0.9782 1.0847 1.0813 0.1110
774

Suezmax VLCC
1-Month SSDV 24 0.0803 0.1220

ahead SRW 0.8822UU 0.0709 1.1508UU 0.1405
RMRSS 0.9454UU 1.0716UU 0.0760 1.0714UU 0.9310 0.1308
MRSS 0.8924UU 1.0115 0.9440UU 0.0717 1.0578UU 0.9192UU 0.9874 0.1291
2-Month SSDV 23 0.0836 0.1256
ahead SRW 0.8695UU 0.0727 1.1404UU 0.1432
RMRSS 0.9483UU 1.0907UU 0.0793 1.0764UU 0.9439 0.1352
MRSS 0.9075UU 1.0438UU 0.9569UU 0.0759 1.0306U 0.9037UU 0.9575UU 0.1294
3-Month SSDV 22 0.0822 0.1272
ahead SRW 0.8898UU 0.0731 1.1498UU 0.1462
RMRSS 0.9743 1.0951UU 0.0801 1.0720UU 0.9323U 0.1363
MRSS 0.9423UU 1.0590UU 0.9671UU 0.0774 1.0241 0.8906UU 0.9552UU 0.1302
4-Month SSDV 21 0.0834 0.1301
ahead SRW 0.8913UU 0.0743 1.1481UU 0.1494
RMRSS 0.9844 1.1045UU 0.0821 1.0741UU 0.9355 0.1397
MRSS 0.9636U 1.0812UU 0.9789 0.0804 1.0161 0.8850UU 0.9460UU 0.1322
5-Month SSDV 20 0.0797 0.1327
ahead SRW 0.9206UU 0.0734 1.1491UU 0.1525
RMRSS 1.0065 1.0933UU 0.0803 1.0764UU 0.9367 0.1428
MRSS 0.9935 1.0792UU 0.9871 0.0792 1.0088 0.8779UU 0.9373UU 0.1339
6-Month SSDV 19 0.0794 0.1299
ahead SRW 0.9165UU 0.0728 1.1617 UU 0.1510
RMRSS 0.9913 1.0816U 0.0787 1.0822UU 0.9316 0.1406
MRSS 0.9814 1.0708U 0.9900 0.0779 1.0059 0.8659UU 0.9295UU 0.1307
Suezmax VLCC
9-Month SSDV 16 0.0846 0.1383

ahead SRW 0.9113UU 0.0771 1.1264U 0.1557
RMRSS 1.0195 1.1187U 0.0863 1.0525UU 0.9344 0.1455
MRSS 1.0183 1.1173U 0.9987 0.0862 0.9997 0.8875U 0.9498UU 0.1382
12-Month SSDV 13 0.0859 0.1417
ahead SRW 0.9470 0.0813 1.1222 0.1590
RMRSS 1.0550 1.1140 0.0906 1.0535UU 0.9388 0.1492
MRSS 1.0507 1.1095 0.9959 0.0902 0.9803 0.8736 0.9306UU 0.1389
SSDV, SRW, RMRSS and MRSS represent the Standard Seasonal Dummy Variable model wEq. Ž1.x , the Segmented Random Walk model wEq. Ž4.x , the Restricted
Markov Regime Switching Seasonal model wEq. Ž3 .x and the unrestricted Markov Regime Switching Seasonal model wEq. Ž2 .x, respectively. N is the number of
forecasts. Figures in the table are rounded up to four digits and numbers in bold indicate the lowest R.M.S.E. between the models. Numbers on the principal diagonal
are the R.M.S.E. of forecasts from each model and the off diagonal numbers are the ratios of the R.M.S.E. of the model on the corresponding column to the R.M.S.E.
of the model on the corresponding row. However, significance between R.M.S.E. values is shown by the Diebold᎐Mariano test. The Diebold᎐Mariano pairwise test of
the hypothesis that the R.M.S.E. values from two competing models are equal is estimated using a Newey᎐West covariance estimator with a truncation lag equal to
1r3 of the sample Žnumber of forecasts .. U and UU indicate significance at the 10 and 5% level, respectively.
775
freight rates are obtained by multiplying the regime probabilities by their respec-
tive mean values; i.e. by the mean of the model under each market condition, and
adding them up Žsee Hamilton, 1994 for more details..
12
␤ˆ1,0 q Ý ␤ˆ1,i Qi ,t
⌬ X tqm s Ž ˆ
p Ž stqm s 1 . ˆ
p Ž stqm s 2 ..
␤ˆ2,0 q
is1
12
Ý ␤ˆ2,i Qi ,t
is1
In Table 7 R.M.S.E. values for the four competing models, SSDV, SRW, RMRSS
0 Ž7.
and the unrestricted MRSS are shown on the main diagonal, for each forecast
horizon. The off-diagonal numbers are the ratio of the R.M.S.E. of the model on
the row to the R.M.S.E. values of the model on the column. When this number is
greater Žlower. than unity the R.M.S.E. of the model on that row Žcolumn. is
greater than the R.M.S.E. of the model on that column, which indicate that the
model on the column Žrow. provides relatively more accurate forecasts compared
to the model on the row Žcolumn.. In order to test whether the forecasting
accuracy of one model significantly outperforms that of the other, we employ
Diebold and Mariano Ž1995. tests, the significance of which are indicated next to
the R.M.S.E. ratios using asterisks.
In the case of Handysize rates, the SSDV model has the lowest R.M.S.E. for 2, 5,
6 and 12-step ahead forecasts. The RMRSS model has the lowest R.M.S.E. values
for 1, 3, 4 and 9-step ahead forecasts among all models. The Diebold and Mariano
Ž1995. test for the equality of R.M.S.E. values show that both the RMRSS and the
unrestricted MRSS models perform better than the SRW model for 1, 3 and 4
months ahead, and the RMRSS model performs significantly better than the MRSS
model for 1, 2, 5, 6 and 12-step ahead forecasts.
Turning next to the Aframax market results on the same table, the unrestricted
MRSS model performs better than other competing models for up to 2-step ahead
forecasts. From 3-step to 12-step ahead forecasts, R.M.S.E. values for both the
SRW and the RMRSS models are very close and they outperform the other
models. However, results of the Diebold and Mariano Ž1995. test indicate that all
models perform better than the SSDV model up to 4-step ahead and thereafter
there is no significant difference between their forecasting performances. Diebold
and Mariano’s tests on equality of R.M.S.E. values of both RMRSS and unre-
stricted MRSS models also indicate that there is no significant difference between
predictions from these models.
Turning to comparison of forecasting performance of seasonal models for
Suezmax freight rates, it can be seen that the SRW model outperforms other
seasonal models according to R.M.S.E. values. Results of the Diebold and Mariano
Ž1995. tests indicate that the SRW model produces significantly more accurate
forecasts than the RMRSS and the unrestricted MRSS models up to 9-step ahead,
while there is no significant difference between the forecasting performance of
SSDV and RMRSS as well as MRSS models for 5, 6, 9 and 12 months ahead
forecasts. There is also no significant difference between the performance of

models for 12-month ahead forecasts in the Suezmax market. Comparison of
forecasting performance between seasonal models reveals that the unrestricted
MRSS model outperforms other seasonal models significantly up to 6-month
ahead, while according to the Diebold᎐Mariano test, there is no difference
between forecasts of seasonal models beyond 4-step ahead forecasts.
Finally, the results for VLCC freight rates indicate that the SSDV model
outperforms the other models significantly up to 6-months ahead, with the excep-
tion that there is no significant difference between performance of the SSDV
model and the unrestricted MRSS model for seasonality beyond 3-step ahead
forecasts. The unrestricted MRSS model also outperforms the SRW and RMRSS
models in terms of R.M.S.E. up to 12-months ahead, with the exception that there
is no significant difference between the performance of MRSS and SRW models
for 12-month ahead forecasts and MRSS and RMRSS models for 1-month ahead
forecasts. According to the Diebold᎐Mariano’s test results, forecasts from the
unrestricted MRSS model are significantly better than from the SRW model and
the RMRSS model in most cases.
6. Conclusion
The existence and type of seasonality present in tanker freight rates as well as
the stochastic properties of these series are examined in this paper. Tanker freight
rates seem to have a unit root at zero frequency, but not at seasonal frequencies
for the period examined. This by itself suggests that ARIMA and VAR models are
appropriate when modelling the series in univariate or multivariate frameworks,
respectively. However, deterministic seasonal patterns are present in freight rates,
and indicate seasonal increases in November and December to stock up for the
winter and decline in rates from January to April.
Similarities in seasonal rate patterns amongst segments of the tanker industry
are attributed to the nature and pattern of trade in commodities transported by
these ships, while differences emanate from factors that sub-divide tanker shipping
and oil markets such as ship size, flexibility, route and commodity parcel size. It is
also found that seasonal movements are higher during expansionary periods and
lower during contractionary periods, which is in line with the theory of freight rate
formation.
Results suggest that shipowners may be able to use the information on the
seasonal movements of freight markets in order to make business decisions such
as; budget planning, dry-docking of vessels when freight rates are expected to drop
Že.g. February to April., adjusting vessel speeds to increase productivity and ship
repositioning to loading areas during peak seasons. Charterers also can use the
information derived here to optimise their transportation costs by timing, for
instance, their inventory build up outside peak seasons.
Economically, it seems that Markov Regime Switching Seasonal models are
promising in modelling markets where business cycles are prominent. Seasonality
patterns also do vary according to the phase of the cycle the industry is in, and this
feature can be picked up nicely by these kinds of model. However, forecasting with
these models may not be as successful since they require the simultaneous
forecasting of the state of the market and the mean of variables.
Acknowledgements
The authors would like to thank participants’ comments on an earlier version of

this paper presented at the International Conference on World Shipping Markets
Facing the 21st Century, 12᎐15 October 1998, Shenzhen, China. Also Eric Shawyer
of Gibson Shipbrokers, Andrew Hamilton of Clarkson Research Studies, Ian
Marsh of City University Business School, Keith Cuthbertson of Imperial College
and an anonymous referee have provided insightful comments. Naturally, all
remaining errors are ours.
Appendix A: Markov Regime Switching Seasonal (MRSS) Model
Hamilton Ž1989. introduced the Markov Regime Switching model, which allows
for structural shifts in the behaviour of the time series over the estimation period
through a state variable, St , as in Eq. Ž2.. This follows a two-state first-order
Markovian process with the following transition probabilities;
Pr Ž St s 1 < Sty1 s 2 . s P21 , Pr Ž St s 2 < Sty1 s 2 . s P22 s Ž 1 y P21 .
Ž A.1.
Pr Ž St s 2 < Sty1 s 1 . s P12 , Pr Ž St s 1 < S ty1 s 1 . s P11 s Ž 1 y P12 .

where transition probability P12 gives the probability that state 1 will be followed
by state 2, and transition probability P21 gives the probability that state 2 will be
followed by state 1. Transition probabilities P11 and P22 give probabilities that the
current state will not change in the next period. Thus, the unconditional probability
that the process will be in any state at a point is given by
1 y P22 1 y P11
Pr Ž St s 1 . s P1 s , Pr Ž St s 2 . s P2 s
2 y P11 y P22 2 y P11 y P22
Ž A.2.
Assuming normality, the likelihood function for each regime Žstate of the
market. can be written as follows
¡y ž ⌬ X y ␤ y / ¦¥
12 2
⌺ ␤i , j Q i ,t
exp~
1 t 0, j
is2
f Ž ⌬ X t < St s j,Q i ,t ;␤ . s
¢ §
,
'2␲␴ j
2 2␴ j
2
j s 1, 2 Ž A.3.
where, ␤ s Ž ␤ 0, j , . . . , ␤ 12, j , ␴j ., j s 1, 2, is the vector of parameters. The

likelihood function for the entire sample is then formed by a mixture of the
probability distribution of the state variable and the density function for each
regime.
2
f Ž ⌬ X t ;␤ . s ⌺ P Ž ⌬ X t ,St s j;␤ .
js1
¡y ž ⌬ X y ␤ y / ¦¥
12 2
⌺ ␤i ,1 Q i ,t
s
P1
~ t 0,1
is2
'2␲␴ 1
2
exp
¢ 2␴ 1
2
§
¡y ž ⌬ X y ␤ y / ¦¥
12 2
⌺ ␤i ,2 Q i ,t
q
P2
~ t 0,2
is2
exp
¢ §
Ž A.4.
'2␲␴ 2
2 2␴ 2
2
where ␤ s ( ␤ 0, S t , . . . , ␤ 12,S t , ␴S t, PS t ., St s 1, 2 and P1 , P2 are the probabilities of

the regime being in state 1 or 2, respectively. Therefore, the log-likelihood function
is
T
LŽ␤ . s Ý log f Ž ⌬ X t ;␤ . Ž A.5.
ts1
which can be maximised using numerical optimisation methods, subject to the

constraint that P1 q P2 s 1 and 0 F P1 , P2 F 1.
Appendix B: Definition of the Yi t variables in Eq. (5)
For monthly time series, Yit variables in the Beaulieu and Miron Ž1993. test are
derived from the following trigonometric Fourier transformations:
12
Y1,t s Ý cos Ž0 i␲ . B iy1 Ž X t . s X t q X ty1 q X ty2 q X ty3 q X ty4 q X ty5 q X ty6
is1
q X ty7 q X ty8 q X ty9 q X ty10 q X ty11
12
Y2,t s Ý cos Ž i␲ . B iy1 Ž X t . s yXt q X ty1 y X ty2 q X ty3 y X ty4 q X ty5
is1
y X ty6 q X ty7 y X ty8 q X ty9 y X ty10 q X ty11
12
Y3,t s Ý cos Ž i␲r2. B iy1 Ž X t . s yXty1 q X ty3 y X ty5 q X ty7 y X ty9 q X ty11
is1
12
Y4,t s y Ý sin Ž i␲r2. B iy1 Ž X t . s yX t q X ty2 y X ty4 q X ty6 y X ty8 q X ty10
is1
12 1
Y5,t s Ý cos Ž2 i␲r3. B iy1 Ž X t . s y 2 Ž X t q X ty1 y 2 X ty2 q X ty3 q X ty4
is1
y2 X ty5 q X ty6 q X ty7 y 2 X ty8 q X ty9 q X ty10 y 2 X ty11 .
12 '3
Y6 ,t s Ý sin Ž2 i␲r3. B iy1 Ž X t . s 2
Ž X t y X ty1 q X ty3 y X ty4
is1
qX ty6 y X ty7 q X ty9 y X ty10 .
12 1
Y7,t s Ý cos Ž i␲r3. B iy1 Ž X t . s y 2 Ž X t y X ty1 y 2 X ty2 y X ty3 q X ty4
is1
q2 X ty5 q X ty6 y X ty7 y 2 X ty8 y X ty9 q X ty10 q 2 X ty11 .
12 '3
Y8,t s Ý sin Ž i␲r3. B iy1 Ž X t . s y 2
Ž X t q X ty1 y X ty3 y X ty4
is1
qX ty6 q X ty7 y X ty9 y X ty10 .
12 1
Y9,t s Ý cos Ž5i␲r6. B iy1 Ž X t . s y 2 Ž '3 X t y X ty1 q X ty3 y '3 X ty4
is1
q2 X ty5 y '3 X ty6 q X ty7 y X ty9 q '3 X ty10 y 2 X ty11 .
12 1
Y10 ,t s Ý sin Ž5i␲r6. B iy1 Ž X t . s 2 Ž X t y '3 X ty1 q 2 X ty2 y '3 X ty3
is1
qX ty4 y X ty6 q '3 X ty7 y 2 X ty8 q '3 X ty9 y X ty10 .
12 1
Y11 ,t s Ý cos Ž i␲r6. B iy1 Ž X t . s y 2 Ž '3 X t q X ty1 y X ty3 y '3 X ty4
is1
y2 X ty5 y '3 X ty6 y X ty7 q X ty9 q '3 X ty10 q 2 X ty11 .

12 1
Y12 ,t s y Ý cos Ž i␲r6. B iy1 Ž X t . s y 2 Ž X t q '3 X ty1 q 2 X ty2 q '3 X ty3
is1
qX ty4 y X ty6 y '3 X ty7 y 2 X ty8 q '3 X ty9 y X ty10 .
Where B iy1 is the lag operator and X t is the monthly series.
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Economic Modelling 19 Ž2002.

Seasonality patterns in tanker spot freight

Accepted 20 April 2001

JEL classifications: L91; L92; C22; C51; C53

2.1. Deterministic seasonality

The deterministic seasonal variations in a series can be investigated by regress-

Where Q it , i s 2,...,12, are relative seasonal dummies,4 12 is the number of

2.2. Alternati¨ e models of deterministic seasonality under different market conditions

Fig. 1. The shipping freight market.

To investigate empirically whether seasonal effects vary under different market

⌬ X t s ␤ 0,S t q ␧ S t ,t , S t s 1,2 Ž4.

2.3. Stochastic seasonality

An additional problem when testing for deterministic seasonality is that if the X t

3. Tanker markets and freight rates

Fig. 2. Monthly spot freight rates for different size tankers.

VLCC Suezmax Aframax Handysize

Mean 3.69 4.35 4.76 5.12

Suezmax rates to be symmetrically distributed around their means. However,

Following the Franses et al. Ž1995. suggestion on testing deterministic and

Frequency VLCC Suezmax Aframax Handysize

␣0 2.68 2.49 2.45 2.42

4.1. Stochastic seasonality

4.2. Deterministic seasonality

Testing the existence of deterministic seasonality when stochastic seasonality is

Month Coef VLCC Suezmax Aframax Handysize

Const. ␤0 0.004 Ž0.350. 0.004 Ž0.443. 0.003 Ž0.347. 0.002 Ž0.239.

Jan. ␤1 I0.110 (I2.933)

R2 0.059 0.074 0.084 0.048

4.3. Seasonality patterns under different market conditions

To allow for different seasonality effects under expansionary and contractionary

M.G. Ka¨ ussanos, A.H. Alizadeh-M r Economic Modelling 19 (2002) 747᎐782

Pr ŽSt s 1 <Sty1 s 2 . s P 21 , Pr ŽSt s 2 <Sty1 s 2 . s P 22 s Ž1 y P 21 .

Const. 0.028 y0.012 0.012 0.0005 0.005 0.003 0.005 y0.0001

Oct. I0.106 0.094

M.G. Ka¨ ussanos, A.H. Alizadeh-M r Economic Modelling 19 (2002) 747᎐782

Dec. 0.084 0.068

P 12 0.149 Ž2.224 . 0.041 Ž2.465 . 0.026 Ž1.403 . 0.016 Ž1.068 .

R2 0.214 0.241 0.413 0.147

8.4% in October, November and December during market expansions as opposed

M.G. Ka¨ ussanos, A.H. Alizadeh-M r Economic Modelling 19 (2002) 747᎐782

PrŽSt s 2 <Sty1 s 2. s P22 s Ž1 y P21 .

␥St y0.254 Žy0.719. 0.104 Ž1.391. 0.032 Ž0.587. 0.046 Ž0.322.

P12 0.102 Ž2.527. 0.048 Ž2.062. 0.015 Ž1.279. 0.016 Ž0.996.

PrŽSt s 2 <Sty1 s 2. s P22 s Ž1 y P21 .

R2 0.132 0.217 0.369 0.145

M.G. Ka¨ ussanos, A.H. Alizadeh-M r Economic Modelling 19 (2002) 747᎐782

␤ 0,1 0.019 Ž1.558 . 0.011 Ž0.479 . 0.004 Ž0.551 . 0.004 Ž0.273 .

P 12 0.113 Ž1.395 . 0.049 Ž1.847 . 0.008 Ž0.595 . 0.018 Ž0.879 .

Once regime probabilities at time t q m are determined, forecasts of changes in

M.G. Ka¨ ussanos, A.H. Alizadeh-M r Economic Modelling 19 (2002) 747᎐782

M.G. Ka¨ ussanos, A.H. Alizadeh-M r Economic Modelling 19 (2002) 747᎐782

1-Month SSDV 24 0.0803 0.1220

9-Month SSDV 16 0.0846 0.1383

forecasts. There is also no significant difference between the performance of

The authors would like to thank participants’ comments on an earlier version of

Appendix A: Markov Regime Switching Seasonal (MRSS) Model

Pr Ž St s 2 < Sty1 s 1 . s P12 , Pr Ž St s 1 < S ty1 s 1 . s P11 s Ž 1 y P12 .

where, ␤ s Ž ␤ 0, j , . . . , ␤ 12, j , ␴j ., j s 1, 2, is the vector of parameters. The

where ␤ s ( ␤ 0, S t , . . . , ␤ 12,S t , ␴S t, PS t ., St s 1, 2 and P1 , P2 are the probabilities of

which can be maximised using numerical optimisation methods, subject to the

Appendix B: Definition of the Yi t variables in Eq. (5)

y2 X ty5 q X ty6 q X ty7 y 2 X ty8 q X ty9 q X ty10 y 2 X ty11 .

qX ty6 y X ty7 q X ty9 y X ty10 .