Stock market efficiency and international shipping-market information

• Shipping freight rates predict stock markets sector-wise and worldwide.
• Stock return predictability is statistically and economically significant.
• Time varying risk premia does not explain this predictability.
• Results are in line with gradual information diffusion hypothesis.

Changes in international shipping freight rates can predict US and international stock market returns. In today’s global world where economies are linked, shipping freight rates carry information about economic activity and stock returns. Using US size and sector indices we find that shipping market movements can explain returns and volatility of stock indices. The results are economically significant and cannot be explained by time-varying risk premia thus constituting a challenge to the EMH. Consistent with the gradual information-diffusion hypothesis, investors are slow in responding to the information from changes in shipping freight rates across industries and around the world.