Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2018/1: The value of foresight in the drybulk freight market

Vit Prochazka (), Roar Adland () and Stein W. Wallace ()
Additional contact information
Vit Prochazka: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH Department of Business and Management ScienceHelleveien 30N-5045 BergenNorway
Roar Adland: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH Department of Business and Management ScienceHelleveien 30N-5045 BergenNorway
Stein W. Wallace: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH Department of Business and Management ScienceHelleveien 30N-5045 BergenNorway

Abstract: We analyze the value of foresight in the drybulk freight market when repositioning a vessel through space and time. In order to do that, we apply an optimization model on a network with dynamic regional freight rate differences and stochastic travel times. We evaluate the value of the geographical switching option for three cases: the upper bound based on having perfect foresight, the lower bound based on a "coin flip", and the case of perfect foresight but only for a limited horizon. By combining a neural network with optimization, we can assess the impact of varying foresight horizon on economic performance. In a simple but realistic two-region case, we show empirically that the upper bound for large vessels can be as high as 25% cumulative outperformance, and that a significant portion of this theoretical value can be captured with limited foresight of several weeks. Our research sheds light on the important issue of spatial efficiency in global ocean freight markets and provides a benchmark for the value of investing in predictive analysis.

Keywords: Dry bulk market; dynamic programming; neural network; foresight

JEL-codes: C44; C60; C61

21 pages, January 31, 2018

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