Stock returns and real asset prices in dry bulk shipping

The motivation for this study lies in the observation that during the second half of 2008, when turbulence in financial markets was already well under way and freight rates in dry bulk shipping had started their freefall from the unprecedented sky-high levels they had reached in early 2008, key players in the industry continued to place orders and/or buy new ships. We pose the question whether the collapse in real asset prices could have been predicted by crumpling stock prices and, therefore, whether falling stock prices could have been used as a reliable signal in the decision making process by the shipping entrepreneurs. In this context, our paper sets out to investigate the relationship between real asset prices (new building and second-hand alike) and stock returns in the dry bulk shipping industry. Although dry bulk freight rates have long been a core subject in the maritime literature, most research has concentrated on volatility (Jing et al., 2008), seasonality (Kavussanos and Alizadeh, 2001), and dynamics (Veenstra and Franses, 1997; Tvedt, 2003; Xu et al., 2011). To our best knowledge, new building and second-hand prices have not yet come under close scrutiny. This study advances the existing literature by testing the relationship between real asset prices in dry bulk shipping and international stock prices of listed dry bulk shipping firms. Using monthly data from January 2007 to the present, we apply GMM methodology and find that the stock index clearly leads asset prices. Moreover, the ECMs developed indicate the existence of a long-run positive lead relationship of the stock index, confirming the so-called “financial markets’ lead” over the real economy in the case of the shipping sector.