Transport Policy 125 (2022) 37–47

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Transport Policy
journal homepage: www.elsevier.com/locate/tranpol

Measuring volatility spillover effects in dry bulk shipping market

Jialin Yang a, Ying-En Ge b, *, Kevin X. Li c
a
College of Transport & Communications, Shanghai Maritime University, Shanghai, China
b
College of Transportation Engineering, Chang’an University, Xi’an, Shaanxi, China
c
Ocean College, Zhejiang University, Zhoushan, Zhejiang, China

A R T I C L E I N F O A B S T R A C T

Keywords: Dry bulk shipping market, as an indispensable part of maritime supply chains, can be affected by the transport
Dry bulk shipping market demand from commodity market, the costs from bunker market, the macroeconomic environment, and threats
Secondhand price from the competitor market. To analyze such interactions between these markets, this paper proposes the use of a
VAR model
vector-autoregression (VAR) model to explore volatility spillover effects in dry bulk shipping markets in terms of
Impulse-response
Variance decomposition
the secondhand ship prices of Capesize, Panamax and Handymax during 2009–2019. The characteristics of sub-
Historical decomposition segments of dry bulk shipping market are deeply analyzed, which are necessary for asset allocation in shipping
industry. A series of numerical experiments are carried out, by means of variance decomposition approach and
historical decomposition approach. Results reveal the existence of different responses to shocks in sub-segments
of dry bulk shipping market. It is also shown that smaller vessels are more likely to be affected by related markets
except the outlier of the relationship between China interest rate and Panamax market. In addition, responses to
both negative and positive contributions are discussed. For example, commodity market has a profound effect on
dry bulk shipping market when the market is stable, whereas influences of the bunker market represents the
volatility of a market. Finally, this paper finds insignificant effects of the US-CNY exchange rate market and the
container shipping market on the dry bulk shipping market.

1. Introduction
As a primary supporter and facilitator of global trade, shipping be­
comes more and more important in the development of world economy.
The dry bulk shipping sector accounts for more than 40% in global
trading in terms of volume (UNCTAD, 2018). However, the dry bulk
shipping market suffers from a variety of high risks because of its
volatility especially after the Subprime Crisis that started in the Autumn
2007 (Alexandridis et al., 2018). The dry bulk shipping market is not an
isolated one as it transports goods that are traded in global commodity
markets to fulfill demand in every region of this world. The demand
from the commodity market drives the dry bulk shipping market. On the
other hand, ships need bunker as engine power so that bunker price
plays a role of the operating cost in the dry bulk shipping market. As a
derivative market, the dry bulk shipping market relies much on the
macroeconomic environment. Global events like the Subprime Crisis,
high speed development in countries or a new policy could have a great
influence on the dry bulk shipping market. Besides, some cargos may be
transported by different ships that could stimulate competition in
shipping markets, such as the dry bulk shipping market and the
container shipping market (Tsouknidis, 2016). Even in the dry bulk
shipping market, there are several categories of ships serving in the
sub-segment shipping markets, such as Capesize, Panamax and Handy­
max. These vessels are active in different markets and their abilities to
resist risks vary according to their size and the markets they serve
(Stopford, 2014; Xu et al., 2011). Besides, size effect may not keep the
efficiency when issues happen (Gong et al., 2019). In this way, market
stakeholders could place their assets in sub-segments of dry bulk ship­
ping markets to avoid risks.
The volatility spillover effect focuses on volatility caused by related
markets rather than the historical volatility. The investigation of vola­
tility spillover effects in the dry bulk shipping market has profound
implications for market stakeholders (Tsouknidis, 2016; Yang et al.,
2021). First, volatility reflects the environment of the market and mar­
ket participants’ willingness to stay at the market. Thus, market par­
ticipants are able to value their assets in the dry bulk shipping market
through investigating the volatility in the market. Besides, it can help to
implement portfolio diversification and hedging strategies. Second, the
volatility spillover effect examines the relationships between related
markets that market participants may notice changes in the dry bulk

* Corresponding author. College of Transportation Engineering, Chang’an University, Shangyuan Road, Weiyang District, Xi’an, Shaanxi, China.
E-mail addresses: yangjialin36@stu.shmtu.edu.cn (J. Yang), yege@chd.edu.cn (Y.-E. Ge), kxli@zju.edu.cn (K.X. Li).

https://doi.org/10.1016/j.tranpol.2022.01.018
Received 28 December 2020; Received in revised form 5 December 2021; Accepted 25 January 2022
Available online 5 March 2022
0967-070X/© 2022 Published by Elsevier Ltd.
J. Yang et al. Transport Policy 125 (2022) 37–47

shipping market in advance by investigating volatility in information Shipping industry is a capital-intensive industry, and insights gained
transmitter markets. Third, secondhand ship prices explain market from a well-designed investigation of the industry in the macroeconomic
environment better than newbuilding prices as secondhand ship could environment are important for company managers and policy makers to
be ready for markets at once without an up-to-3-year delay. control financial costs (Yu et al., 2019). A rise of interest rate will in­
The contribution of this paper is trifold. First, a comprehensive crease the debt risk of shipping companies and deteriorate the cash flow
mechanism is established to measure spillover effects on different seg­ position, leading to a potential increase in the probability of a dry bulk
ments of dry bulk shipping markets in terms of demand, cost, macro­ ship to be scrapped (Alizadeh et al., 2016). Besides, exchange rate is one
economy as well as container shipping market. Second, a robust of the most concerned risk factors among 64 risk factors of shipping
approach is proposed to specifying the contribution of each index to the companies (Wan et al., 2019). Consequently, exploring the spillover
dry bulk shipping market. Third, characteristics of Capesize market, effects of dry bulk shipping market and interest rate along with ex­
Panamax market and Handymax market are investigated in a compar­ change rate may provide useful insights for risk management, which is
ative way to identify an advisable investment strategy for market par­ also not fully analyzed yet.
ticipants. In addition, a 10.5-year dataset from January 2009 to July Spillover effects of the dry bulk shipping market on the tanker
2019 is used to cover several important global economic events, such as market are well discussed. Tsouknidis (2016) explores the volatility
subprime crisis. In this way, implications can be obtained as to whether spillover effects dynamically and finds that their relationship tends to be
the responses of the dry bulk shipping market to related markets appear more intense during or post the Subprime Crisis than the rest of the
persistent or only during the volatile environment. This investigation is period. But the container shipping market is hardly considered in this
also to forecast and explore the spillover effects in next 12 months and context. Li et al. (2018) shows that the dynamics of sub-segments of the
analyze the historical shocks. shipping market reveal the existence of the effects on each other. For
The remainder of this paper is organized as follows: Section 2 offers a example, the volatility in dry bulk shipping market will be transmitted to
literature review to identify the academic gap the work is to fill up. the container shipping market. Therefore, it is necessary to develop an
Section 3 outlines the methodology proposed in this study. Data and information transmission framework for the dry bulk shipping market
descriptive statistics are presented in Section 4. Section 5 presents by taking the container shipping market into consideration.
empirical results with the analysis of them plus main findings. Section 6 This study aims to propose a more comprehensive method for anal­
closes up this paper with a set of concluding remarks plus a discussion ysis of the spillover effects in the dry bulk shipping market. Besides, the
ospillover effects in the dry bulk shippingn implications of this work. use of secondhand dry bulk ship prices in this analysis constructs a more
detailed exploration of the dry bulk shipping market.
2. Literature review
3. Methodology
A growing number of papers published in the international scholarly
journals have explored the spillover effects between markets (Batten The time-varying volatility and the possible spillover effects of the
et al., 2019; Ben Zeev, 2019; Kavussanos and Visvikis, 2006; Li et al., dry bulk shipping market on related markets are explored in this paper
2014; Pouliasis et al., 2018; Sekine and Tsuruga, 2018; Shi et al., 2013). by means of a vector-autoregression (VAR) model, which is proposed by
A meaningful review of shipping finance studies from 1979 to 2018 have Sims (1980) and widely used for analyzing and forecasting multivariate
been presented (Alexandridis et al., 2018). These efforts have shown economic time series. Besides, it allows exploring the constitution of a
that a well-developed information transmission mechanism can effec­ set of variables as a linear function of their past values. To investigate
tively minimize risks in shipping market, and deserves a further in-depth spillover effects of these indicators, this paper relies on an
investigation. The forecasting performance will turn to be better when impulse-response function (Choi and Chudik, 2019), variance decom­
market information is involved in the traditional shipping market position model (Diebold and Yilmaz, 2012) and historical decomposi­
models, which strengthens the fact that market environment can influ­ tion model (Balcilar et al., 2018).
ence the shipping market (Ko, 2018). The interactions between com­ In this paper, the returns of indexes are defined as
modity and shipping markets have received a lot of attention from ( / )
ri,t = log pi,t pi,t− 1 (1)
stakeholders and researchers (Angelopoulos et al., 2020; Sun et al.,
2020). Kavussanos et al. (2014) find that the agriculture commodity
where pi,t is the price of index i at time t. It should be noticed that, in the
market informationally leads the freight rate market by proposing
following part, the subscript i (i = 1,2,3) represents the dry bulk shipping
Generalized Auto-Regressive Conditional Heteroskedasticity (GARCH)
market, specifically i = 1, for the Capesize market, 2 for Panamax
models as an extent investigation of spillovers between spot markets.
market, and 3 for Handymax market. The subscript j (j = 4, 5,6,7) ex­
Angelopoulos et al. (2020) find that iron futures, reacting faster to new
plains the commodity market, the bunker market, macroeconomic in­
information than physical markets, prominently and informationally
dicators and the container shipping market, respectively. Besides, the
lead the shipping freight market. A detailed investigation framework is
subscript k means the kth sub-segment market in market j, for example,
built in their research.
Cost control is a core strategy in company management, thus the rkj is the return of kth sub-segment market in market j. The vector auto-
relationship between oil market and dry bulk shipping market should be regression (VAR) function could be written as
deeply explored. Capesize dry bulk shipping market is highly related to ⎡ ⎤ ⎡ ⎤ ⎡ ⎤⎡ ⎤
crude oil market. A combined hedging strategy is shown to avoid the ⎢
ri,t
⎥ ⎢
ai
⎥ ⎢ aii aij1 aijk ⎥⎢ pi,t− 1 ⎥
⎢ r1 ⎥ ⎢ a1 ⎥ ⎢ ⋯ ⎥⎢ 1 ⎥
mis-estimation in strategies that only consider the cost or the revenue ⎢ j,t ⎥ ⎢ j ⎥ ⎢ a1ji a11 a1k ⎥⎢ p
jj ⎥⎢ j,t− 1 ⎥
⎥
(Sun et al., 2018). GARCH models are proposed in Gavriilidis et al. ⎢ ⎥=⎢ ⎥+⎢ jj
⎢⋮ ⎥ ⎢⋮ ⎥ ⎢ ⎢ ⋮ ⋱ ⋮ ⎥⎢ ⋮
⎥⎢
⎥
⎥
⎣ k ⎦ ⎣ k ⎦ ⎣
(2018) to examine the volatility spillover effect between the oil market rj,t aj k k1
aji ajj ⋯ ajj kk ⎦⎣ k
pj,t− 1
⎦
and the tanker market by considering different sizes of tanker ships
⎡ ⎤⎡
while the risk in the dry bulk shipping market is measured in Yang et al. ⎤ ⎡ ⎤
(2021) with a value-at-risk approach by means of Baltic Dry Index (BDI). ⎢ bii bij1 bijk ⎥ ri,t− 1 ε
⎢ 1 ⋯ ⎥⎢ ⎥ ⎢ i,t ⎥
Furthermore, Sun et al. (2019) indicate the leading role of the crude oil ⎢ bji b11 b1k ⎥⎢ r 1
jj ⎥⎢ j,t− 1
⎥ ⎢ ε1
⎥ ⎢ j,t
⎥
⎥
+⎢ jj
⎢ ⎥+⎢ ⎥ (2)
market in the tanker shipping sector, and the transmission of the vola­ ⎢⋮
⎢ ⋱ ⋮ ⎥ ⎥⎢ ⋮ ⎥ ⎢⋮ ⎥
⎣ k ⎣ ⎦ ⎣ k ⎦
tility from the bunker market to the tanker shipping market. It is kk ⎦ rk εj,t
bji bk1
jj ⋯ bjj j,t− 1
acknowledged that the spillover effects of the bunker market on the dry
bulk shipping market is not fully investigated.

38
J. Yang et al. Transport Policy 125 (2022) 37–47

The simplified form is

∑
∞

Rt = C + APt− 1 + BRt− 1 + εt (3) rt = Θn wt− n (9)

n=0

⎡ ⎤ ⎡ ⎤
aij1 aijk ⎥ where Θn = ∅n O and wt− n = O− 1 δt− n . Then, we have:
⎢ 1
ai
⎥ ⎢ aii
⎢ 1 ⋯ ⎥
⎢a
⎢ j
⎥
⎥ ⎢ aji a11 a1k ⎥ ∑
m− 1 ∑
∞
where C = ⎢ ⎥, A = ⎢
⎢⋮
jj jj ⎥, B = rt+m = Θn wT+m− n + Θn wT+m− (10)
⎢⋮
⎣ k
⎥
⎦ ⎢ ⋱ ⋮ ⎥ ⎥ n=0 n=m
n
⎣ k ⎦
aj aji ak1
jj ⋯ akk
jj
⎡ ⎤ in which the first item on the RHS is part of rt+m and represents the
⎡ ⎤ shocks after time T, and the second item is the base projection and
⎢ bii bij1 bijk ⎥ ε
⎢ ⋯ ⎥ ⎢ i,t ⎥ represents the forecast of rt+m that depends on information at time t.
⎢ 1 ⎢ ε1
b11 1k ⎥ ⎥
⎢ bji bjj ⎥ ⎢ j,t ⎥
⎢ jj
⎥, ε t = ⎢ ⎥, ai is a constant. And the co­
⎢⋮
⎢ ⋱ ⋮ ⎥ ⎥
⎢⋮
⎣ k
⎥
⎦ 4. Data description
⎣ bk bk1 ⋯ kk ⎦
bjj εj,t
ji jj
The data examined in this study comprise monthly prices of three
efficients bijk and bkji explain the spillover effects between market i and kinds of secondhand dry bulk ships,1 dry bulk goods prices,2 bunker
kth market in market j, and ε is the error vector. prices,3 macroeconomic indicators4 as well as containership time-
To better understand the spillover effects of these markets and charter rate index published by Clarksons Research. The secondhand
identify the effects of a shock on variables, the impulse-response func­ ship prices can reflect demand and supply in the dry bulk shipping
tion is applied. This paper follows Choi and Chudik (2019), and the VAR market, and are close to actual market environment compared with
function is written as follows newbuilding prices. The goods prices represent the upstream of shipping
⎡ ⎤ ⎡ ⎤ supply chains. The costs of the dry bulk shipping market are described
r r by bunker prices. Besides, as part of the world economy, the dry bulk
⎢ i,t ⎥ ⎢ i ⎥ shipping market is widely affected by global economic environment.
⎢ r1 ⎥ ⎢ r1 ⎥
⎢ j,t ⎥ ⎢ j ⎥
⎢ ⎥=⎢ ⎥ The container shipping market serves both a competitor and a substitute
⎢⋮ ⎥ ⎢⋮ ⎥
⎣ k ⎦ ⎣ ⎦ of the dry bulk shipping market.
rj,t rjk
Among the aforementioned indices, the prices of secondhand dry
⎡ ⎤i ⎡ ⎤i ⎡ ⎤ bulk ships exhibit monthly time series. Therefore, in order to ensure the
⎢ aii aij1 aijk ⎥ ⎢ bii bij1 bijk ⎥ εi,t computability of data in this study, all indices are examined over the
∞ ⎢ ⋯ ⎥⎢ 1 ⋯ ⎥⎢ ⎥
period from January 2009 to June 2019 monthly. The time period of
∑ ⎢ a1ji a11 a1k ⎥⎢
jj ⎥ ⎢ bji b11 b1k ⎥ ⎢ ε1
jj ⎥ ⎢ j,t
⎥
⎥
+ ⎢
⎢
jj jj
⎢ ⎥ (4) interest is larger than 10 years, which actually covers a typical business
i=0 ⎢ ⋮ ⋱ ⋮ ⎥ ⎢
⎥ ⎢⋮ ⋱ ⋮ ⎥ ⎥⎢ ⋮ ⎥
⎣ k ⎦⎣ k ⎦ ⎣ k ⎦ cycle. Meanwhile, the period describes the recovery stage of the dry bulk
aji ak1 ⋯ kk
ajj bji bk1 ⋯ kk
bjj εj,t
jj jj
shipping market after the Subprime Crisis. It provides useful implica­
tions for market participants to hedge or avoid risks in advance. The
A more simplified form of it is given below sample contains 127 monthly observations for dry bulk shipping mar­
∑
∞ kets and its related markets. The number of monthly observations may
rt = μ + ∅n εt− n (5) not be sufficient enough to deeply investigate their relationships, but it
can tell the tendency and the relationship mechanisms.
n=0

where the coefficient matrix ∅n is the effect of shocks from ε on return The return lines in Fig. 1 show the volatility of the referred indices.
series, and ∅0 is the right time effect. Specifically, ∅n means the effect of The blue lines describe the secondhand ship prices of Capesize, Panamax
εt on rt+n . and Handymax while the red or yellow lines exhibit the returns of the
Another way to measure spillover effects is the variance decompo­ rest markets, respectively. The expanded time period covers time series
sition. It explores the nature of financial market interdependence. An before the Subprime Crisis. Related relationships between the dry bulk
approach developed in Diebold and Yilmaz (2012) is used in this study shipping market, commodity market, bunker market as well as the
to divide rich information into an individual spillover effect. In this container shipping market are shown in the monthly price returns.
approach, the VAR function is written as Surprisingly, the returns of interest rates of China and USA, along with
the exchange rate of their currencies, exhibit insignificant relationships
∑ with the dry bulk shipping market.
∞
rt = Ak εt− 1 + εt (6)
k=0 The descriptive statistics of the returns defined in the previous sec­
tion are present in Table 1. Panel A describes the dry bulk shipping
where Ak is the moving average coefficient matrix. Then, to forecast the market. As observed, the average returns of examined indices are
H-step-ahead error variance by zijk (H) for H = 1, 2, …, we have negative but almost near to zero. The volatilities are statistically higher
for larger vessels than smaller ones, for example, the maximum of
∑ ( ∑ )
δii H− 1 εi Ah ´ εkj 2 Capesize is 0.2927 and the minimum is − 0.1699 whereas the statistics
zijk (H) = ∑ h=0 (7)
H− 1 ( ∑´ ´ k) for Handymax are 0.1054 and − 0.1411, respectively. Besides, the
h=0 εi Ah Ah ε j
standard deviation of Capesize is still larger than that of Panamax and
Handymax. The returns of commodity markets, bunker market,
where Σ is the variance matrix for the error vector ε, δijk is the standard
deviation of the error term for the ith equation.
For the sample period, we use historical decomposition (Balcilar
et al., 2018) to estimate individual contributions of each index to the 1
180k dwt 5-year old Capesize, 76k dwt 5-year old Panamax and 58k dwt 5-
∑
movements in the dry bulk shipping market. First, = OO , O is a year old Handymax.
′

2
lower triangular matrix. Then, the VAR function can be written below US gulf corn, Iron Ore Spot CFR China, Thermal Coal, FOB Australia.
3
HSFO 380cst Bunker (3.5% Sulphur), Singapore.
4
USA Interest Rates (1 year), China Interest Rates: PBOC 1-year rate, Ex­
change Rates of US dollar and RMB.

39
J. Yang et al. Transport Policy 125 (2022) 37–47

Fig. 1. Returns of indices (1999.11–2019.06).

40
J. Yang et al. Transport Policy 125 (2022) 37–47

Table 1
Descriptive statistics.
Observations Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis Jarque-Bera Probability p-value of ADF*

Panel A: Dry bulk shipping markets

RCAP 127 − 0.00319 0 0.29267 − 0.1699 0.052538 0.979355 10.53672 320.8799 0 0
RPAN 127 − 0.00333 0 0.149532 − 0.12516 0.04801 0.163725 4.52802 12.92262 0.001563 0
RHAN 127 − 0.00296 0 0.105361 − 0.14108 0.042157 − 0.48336 4.005353 10.29384 0.005817 0
Panel B: Commodity markets
RCOAL 127 − 0.0015 − 0.00546 0.245659 − 0.21167 0.062459 0.40457 5.073945 26.22526 0.000002 0
RCORN 127 − 0.00012 0 0.195823 − 0.18334 0.065273 0.127317 3.851515 4.179972 0.123689 0
RIRON 127 0.001721 0.012208 0.245053 − 0.28691 0.097516 − 0.13738 2.824733 0.56206 0.755006 0
Panel C: Bunker market
R380 127 0.003374 0.004064 0.201495 − 0.24102 0.078456 − 0.52657 4.562391 18.78635 0.000083 0
Panel D: Economic Indicators
RICN 127 − 0.0018 0 0.287682 − 0.28768 0.059972 0.06668 20.03745 1536.131 0 0
RIUS 127 0.003682 0 0.05506 − 0.03704 0.013006 2.296335 9.731894 351.425 0 0.0053
RER 127 0.000235 − 0.00047 0.038304 − 0.02279 0.008507 1.039435 6.276948 79.69299 0 0
Panel E: Container shipping market
RCON_TR 127 0.002321 − 0.00023 0.212948 − 0.14745 0.052352 0.718359 6.117764 62.36023 0 0

Note.
*
Mackinnon one-side p-values of Augmented Dickey-Fuller test statistic.

Table 2
Variance decomposition results.
Panel A: Commodity markets

Ship COAL CORN IRON R_Ship R_COAL R_CORN R_IRON

Capesize 0.285535 0.072088 1.275231 0.310977 92.44178 1.121122 0.034133 4.459131

Panamax 1.015118 0.327216 6.502288 0.294835 83.12660 0.649740 0.643514 7.440686
Handymax 3.476574 2.217810 1.225421 0.326094 75.94006 2.754821 4.365409 9.693812

Panel B: Bunker markets

Ship Bunker (380) R_Ship R_380

Capesize 0.211615 0.536380 95.61799 3.634019

Panamax 1.332887 5.654356 91.11891 1.893843
Handymax 4.102324 1.700207 87.61581 6.581655

Panel C: Interest Rates markets

Ship ICN IUS R_Ship R_ICN R_IUS

Capesize 1.196699 0.242893 1.970797 96.41513 0.046067 0.128412

Panamax 0.338674 5.215308 0.159376 93.85253 0.419553 0.014563
Handymax 2.291684 1.227899 0.009342 96.32803 0.093137 0.049905

Panel D: Exchange Rates markets

Ship ER R_Ship R_ER

Capesize 0.264845 0.001003 98.83641 0.897739

Panamax 0.889396 0.158900 95.96505 2.986655
Handymax 4.058499 0.342516 93.45612 2.142866

Panel E: Container Shipping markets

Ship CON_TR R_Ship R_CON_TR

Capesize 0.200839 0.047610 97.09939 2.652162

Panamax 1.574967 0.311083 92.89336 5.220592
Handymax 3.302012 5.137025 91.19717 0.495110

economic indicators and container shipping market are exhibited in
Panel B, C, D and E, respectively. Most indices are excessive kurtosis,
except iron ore, and are not so much to excess skewness. Specifically, the
ADF test shows the time series of the returns of indexes are stationary.
According to the AR roots test, the VAR models satisfy the stability
condition. These tests mean the results in this study are responsible.
5. Empirical analysis
According to the results presented in Section 4, the dry bulk shipping
market is influenced by a few of related markets. First, Fig. 2 exhibits the
impulse-responses of secondhand ship price returns of the dry bulk
shipping market to related markets. Fig. 2(a) explains the impulse-
response of Capesize, Panamax and Handymax to innovations by
means of commodity market indices. It is obvious that the return of coal
price can affect the returns of secondhand dry bulk ships, and that the
effect on larger vessels may disappear sooner. For example, the effect on
Capesize disappeared in about 5 months while the effects on Panamax
and Handymax lasted for 7.5 months and 10 months, respectively.
Conversely, smaller vessels are more easily affected by the corn price
return, the return of Handymax reacted positively at once and reached
the peak in 1.5 months but turned to be negative in 2.5 months. This
indicates that the volatility from the corn market can stimulate turbu­
lences in the Handymax market in the short run, but it may not last for
over 3 months as long as the volatility in the corn market disappears.
Among the three selected indices in the commodity markets, the return
of iron price is the most influential one. In other words, the dry bulk
shipping market reacts more violently to volatilities from the iron
market than from the other selected commodity markets. These results
could be explained by the fact that different goods are shipped by
different vessels (Stopford, 2014). For example, Capesize vessels are
mainly used for transporting iron ore and Panamax concentrate on

41
J. Yang et al.
Fig. 2. Impulse-response results.
grains and coals, while Handymax focuses on short-distance shipping
and diversified cargo transport.
The spillover effect of the dry bulk shipping market on the bunker
market is exhibited in Fig. 2(b). It is well known that the fuel cost ac­
counts for a large portion of the operating cost of all fuel-engine-driving
machines, including dry bulk ships (Sun et al., 2018). There is no sur­
prise that all secondhand vessel prices are influenced by the volatility in
bunker market. Lower bunker price is an attraction for investors to make
a decision to buy more vessels so that the secondhand ship price will
increase. But if bunker price suddenly increases, the optimal speed of
42
Transport Policy 125 (2022) 37–47
vessels will decrease (Finnsgard et al., 2020). Thus, some investors may
keep away from the dry bulk shipping market and it will have some
influence on the secondhand ship prices, which may explain why the
changes in bunker price have a positive effect on the changes of
secondhand dry bulk ship price. For shipping companies, the volatility
in bunker market is a signal for not ordering new ships or enlarging their
fleet in about 2–3 months. Interestingly, the effects on Panamax dis­
appeared about 1 month earlier than on Capesize and Handymax, which
implies that the bunker price has a more profound influence over
Capesize and Handymax.
J. Yang et al.
Fig. 2. (continued).
Fig. 2(c) and (d) explain the relationships between the dry bulk
shipping markets and the macroeconomy. The dry bulk shipping market
seems to respond insignificantly to the USA Interest Rate, but the return
of China Interest Rate has a positive effect on the return of Panamax
price and a negative effect on the return from Handymax. As a devel­
oping country and the second largest economy in the world, the
reduction in China Interest Rate will promote investment in China and
demand for goods like iron ore will increase, which increases the de­
mand for transportation and the dry bulk ship price increases. Besides,
the increasing volatility in Interest Rates indicates a changeable in­
vestment environment, but the demand for fertilizer and feed which are
mainly transported by Handymax will not reduce significantly. There­
fore, the Handymax market tends to be less violet when the volatility
spillover effects happen to Interest Rates. Furthermore, the responses of
the secondhand ship price returns of dry bulk ships to the return of
exchange rate of US dollars and CNY are unstable, but larger vessels are
easily affected.
Fig. 2(e) indicates an unstable response of the dry bulk shipping
market to the container shipping market, but smaller vessels react more
significantly. Results in Fig. 2(e) mean the secondhand smaller dry bulk
ship price are more vulnerable to the threats from the container shipping
market.
Similar results can be found in the variance decomposition, which
aims to investigate and forecast the contribution of each index to returns
of secondhand dry bulk ship prices in the next 12 months.5 It is obvious
5
Table 2 shows the summarized results, variance decompositions for each
pair of markets in every month are not shown in this paper to save space, and
they are available from the authors upon request.
43
Transport Policy 125 (2022) 37–47
that the secondhand larger vessel prices have less contribution to their
volatility. Panel A describes the contribution of the commodity market
to the Capesize market, Panamax market and Handymax market,
respectively. The volatility in the price of Handymax is easily affected by
the goods it ships, and larger vessels tend to be less sensitive to goods
prices and returns. The size effect can offset part of effects from the
commodity market. The same as the impulse-response analysis, the
volatility from the iron ore market explains the largest part of effects
among all the selected commodity indexes: 4.45% in Capesize market,
7.44% in Panamax market, and 9.69% in Handymax market, indicating
that the signals from the iron ore market are important to the dry bulk
shipping market participants. Bunker price return plays a larger part in
smaller vessels markets, which is verified in Panel B and can be
explained by size effect. This implies that smaller ship buyers and sellers
should concentrate on the bunker price so that there is possibility for
them to avoid risks. Results in Panels C, D and E related to the Interest
Rate market, the Exchange Rate market and the container shipping
market are quite the same with findings in the impulse-response. The
effect from China Interest Rate return to Panamax price return accounts
for 0.42%, quite small, but it is 2 times as much as to Handymax and 10
times as much as that to Capesize. Interest Rates may not directly in­
fluence the dry bulk shipping market, but market participants can not
ignore this vital indicator for two reasons: a) participants need finance in
the market and the cost is related to Interest Rates; b) quantity of their
competitors change with the Interest Rates. In other words, when in­
vestors finance at a lower interest rate, the willingness to invest becomes
strong, and the number of market participants increase at the same time.
Investors in other markets may pour into the shipping market if the
interests in the shipping market are attractive enough, which happened
to the shipping market before the Subprime Crisis. However, if the
J. Yang et al.
Fig. 3. Historical decomposition results.
Interest Rates are too high for investors to afford, it will also be difficult
for them to quit the market. Besides, the total effects of the container
shipping market on the Panamax market and the Handymax market are
both about 5.6%, but the effects on the Capesize market are only about
2.7%, which indicates that the volatility spillover effects of the sub-
segment markets are less significant on larger vessels (Tsouknidis,
2016).
Furthermore, this paper investigates the fluctuations in the selected
time series through identifying the historical structural shocks. The
advantage of this approach is that it is backward looking, implying that
the results are always reasonable for either linear or nonlinear models.
Besides, historical decomposition can explain how differently each
variable contributes to the whole volatility when the shocks occur in the
44
Transport Policy 125 (2022) 37–47
selected period (Balcilar et al., 2018). Fig. 3 exhibits the comprehensive
results of the price returns of the dry bulk shipping market.6 According
to Fig. 3, the Capesize market seems less volatile than the Panamax
market and the Handymax market. The largest positive contribution
happened after China real estate market began to develop. Nevertheless,
the greatest negative contribution follows the Fed raising interest rates
in the first quarter of 2016. Fig. 3(a) is the historical decomposition of
the dry bulk shipping market from the commodity market, which
6
Historical decompositions of dry bulk shipping markets secondhand prices
returns are not shown in this paper, and are available from the authors upon
request.
J. Yang et al.
Fig. 3. (continued).
indicates that the commodity market contributes more when the dry
bulk shipping market is relatively stable. This implies that the partici­
pants of the dry bulk shipping market should concentrate on the goods in
a stable environment because the commodity price return reflects
shipping market demand. However, bunker price takes a larger portion
when negative contributions appear, as shown in Fig. 3(b). It is easy to
understand that market stakeholders have to control their costs if the
shipping markets begin to fall (Drobetz et al., 2012). In the same way, as
exhibited in Fig. 3(c), Interest Rates account for more in the volatile dry
bulk shipping market. However, there is something different that In­
terest Rates are active not only in negative contribution but positive one,
which is because market participants always want to enlarge their fleets
when the dry bulk shipping market turns better, and they need afford the
cost of financing from banks or other financial markets, which is related
to the Interest Rates. Besides, according to Fig. 3(d), the Exchange Rate
works when the positive contribution happens. It can be roughly
explained as market participants would like to seek opportunities
abroad if the dry bulk shipping market is well managed. Moreover, Fig. 3
(e) tells stories about the dry bulk shipping market and the container
shipping market. When the former is stable, the competitiveness of the
latter begins to work. Because in the volatile and highly competitive dry
bulk shipping market, market participants focus on their development
rather than the indirect competitor and substitute.
Note: X-axis is the timeline, and this paper investigates the period
from January 2009 to July 2019. The corresponding relationships are as
follows (e.g. horizontal ordinate-month): 10-October 2009, 20-August
2010, 30-June 2011, 40-April 2012, 50-February 2013, 60-December
2013, 70-October 2014, 80-August 2015, 90-June 2016, 100-April
2017, 110-February 2018, 120-December 2018.
45
Transport Policy 125 (2022) 37–47
6. Concluding remarks
This paper examines the volatility spillover effects between the dry
bulk shipping market and related markets, including the commodity
market, the bunker market, the macroeconomic markets as well as the
container shipping market. A vector-autoregression (VAR) approach has
been proposed for investigating implications in impulse-response (Die­
bold and Yilmaz, 2012), variance decomposition (Choi and Chudik,
2019), and historical decomposition (Balcilar et al., 2018). Specifically,
we can figure out the contribution of each index to shocks in
sub-segments of the dry bulk shipping market, which contributes to asset
allocation. Further, shock durations of the dry bulk shipping market to
different markets can be investigated by impulse-response. More
importantly, based on variance decomposition, we may forecast and
analyze the time-varying spillover effects of the dry bulk shipping
market. Besides, examining contributions congruent with the existing
important economic events may be satisfied by historical
decomposition.
There are important implications from the investigation in this
paper, which are of great importance to all stakeholders and potential
participants in dry bulk shipping markets (Tsouknidis, 2016). First, the
commodity market has larger effects on smaller vessels, and the price
return of iron ores contributes more than coals and corns. The iron ores
are one of the main goods in the dry bulk shipping market and usually
transported by Capesize. However, this does not mean that the ship­
owners of Panamas and Handymax need not analyze the iron ore mar­
ket. In other words, the volatility in the iron ore market has a
non-negligible effect on all the subsegments of the dry bulk shipping
market. At the same time, the commodity market has a profound in­
fluence over the dry bulk shipping market when the market environment
is stable. Second, the responses of the dry bulk shipping market to
J. Yang et al.
bunker price return are more significant in a volatile market environ­
ment because market participants have to control their operating costs,
especially for small ship owners. Large shipping companies have more
pricing power when they face bunker suppliers, which means that they
can control their bunker cost even though the bunker market is unstable.
Third, interest rates are closely related to market stakeholders’ financing
capability, which directly affects their investing willingness. Thus, in­
terest rates contribute more to a volatile market no matter what negative
or positive contribution exists. Besides, China Interest Rates have a
closer relationship with the Panamax market. This certifies that the
Chinese market plays an important role in the dry bulk shipping market.
Fourth, responses of the dry bulk shipping market to Exchange Rate of
US dollars and RMB are insignificant, but it may account for a larger
portion when a positive contribution exists. There is no doubt that the
change in the exchange rate has an influence on the input and output, i.
e., the demand for the dry bulk shipping market, which means that an
indirect relationship exists between the dry bulk shipping market and
the exchange rate. Furthermore, when the information on exchange rate
is transmitted to the secondhand price of dry bulk ships, some important
materials have lost, which explains why the responses are insignificant.
Finally, smaller dry bulk ships are more likely to be influenced by
container shipping market, which is due to the fact that goods, such as
fertilizer, are transported by Handymax and can be packaged and
shipped by containerships. Nevertheless, the spillover effects from the
container shipping market to the dry bulk shipping market is significant
only when the positive contribution happens to the dry bulk shipping
market.
Overall, our results shed light on the spillover effects of the Capesize
market, Panamax market and Handymax market on their related mar­
kets in terms of demand, cost, macroeconomic environment as well as
potential competitor and substitute. The ship size is a key characteristic
that influences the volatility of freight rates (Xu et al., 2011; Fan and Xie,
2021). Adland and Jia (2017) identify characteristics in the Capesize
market, and their results indicate that risks in the market will never
disappear. Their work even reveals that the risks in the Capesize market
decrease as the ship size increases. According to our results, the capacity
of risk resistance varies with the ship size, and smaller ships are more
likely to be affected by shocks. But larger ships need more capital and
more complex management, which requires additional management
fees. Further, small ships like Handymax always serve the near-sea lines
and transport grains, fertile, and the like. The freight transported by
Capesize and Panamax, such as iron ores and coals, is highly demanded
by those economies which need further development. Thus, a diversified
and well-developed fleet is a good way to weaken the effects of the risks
in the dry bulk shipping market (Li et al., 2018).
The numerical results in this paper are consistent with those pre­
sented in the literature that is reviewed and discussed in this paper.
Therefore, the models and methodology used in this paper can be
trustworthy and used for analysis of similar issues.
An in-depth investigation of the dry bulk shipping market may help
market investors improve their risk management (Pouliasis et al., 2018).
It has been widely discussed that the derivative market may play a
leading role in predicting risks in the shipping market (Kavussanos et al.,
2010; Kavussanos and Visvikis, 2004; Yin et al., 2017). Alexandridis
et al. (2017) find the leading role of the derivative markets in the in­
formation transmission framework of the dry bulk shipping sector.
However, one of the limitations of this research is that the data from the
derivative market are not available to other researchers who are inter­
ested in the analysis of this issue. Besides, combining artificial intelli­
gence methods with traditional regression models with an aim to
explore the volatility in the shipping market provides a new way to
measure risks in the shipping market (Liu et al., 2021). Further studies
need concentrate on spillover effects in the dry bulk shipping market
based on derivative market data with artificial intelligence methods.
46
Transport Policy 125 (2022) 37–47
Author statement
This is a fully-joint piece of work.
Acknowledgements
The authors would like to thank the anonymous referees for their
very helpful comments and suggestions. This work was supported in part
by the National Natural Science Foundation of China (Grants#:
72031005, 71774109, 71671110). The authors are also grateful for the
support of the Lloyd’s Register Foundation (Grant: G\100111), a charity
that helps to protect life and property by supporting engineering-related
education, public engagement, and the application of research.
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