Analysis of Term Structure in Dry Bulk Freight Market

Based on the monthly data set from January 1992 to May 2012, this paper applies a VAR model and two time-varying coefficient models to analyze term structure in dry bulk freight market. The resulting three main empirical findings are as follows: 1) The response of long-term rate to short- term structural shock is relatively small and not statistically significant but the response of short-term rate to long-term structural shock is large and statistically significant. 2) Compared with the presumption that in backwardation the short-term rate is inclined to decrease but the long-term rate to increase, but in contango the opposite pressure would function, there is lack of evidence for the stable adjustment speed in both equations for the short- and long-term freight rate. 3) When the market is relatively above the normal level (more backwardation), the effect of the implied forward time charter (IFTC) rate on the actual TC rate becomes larger. When predicting the future TC rate based on IFTC rate, it recommends giving more weight to the IFTC rate in backwardation than in contango.