The Spatial Term Structure of Spot Freight Rates


Spot market indices for the freight markets in bulk shipping, such as those produced by the Baltic Exchange, are estimated by brokers based on a fixed lead time (e.g. “Laydays/cancelling 10/20 days from index date"). In reality, ships can be fixed anywhere along a route such that there may also be a spatial component in the spot freight rate for individual fixtures. Consequently, there is not a single spot rate on a given date, but many along the distance (or time-to-loading) dimension. That is, there exists effectively a spatial “term structure of spot freight rates".

Such a spatial component may reflect the degree of risk aversion of shipowners and charterers and is therefore expected to be market dependent. For instance, charterers may worry about transportation shortage in a strong market and be willing to fix ships early at relatively higher rates, while owners may accept a discount for early ships in a poor market just to secure employment. The objective of this paper is to investigate the time-varying properties of spot rates jointly in the time and space dimension.