An Analysis of Irrational Behaviour in Container Shipping: Historical Analysis From an Intrinsic Value Perspective

Samuel Halldorsson & Emil Vittrup

Student thesis: Master thesis


Shipping is a highly volatile and cyclical industry, where earnings, investments and return on capital appear in waves. The 2003-2009 super-cycle rocked the industry, which is still recovering today. The collapse of the market coincides with the financial crisis, but that does not tell the whole story. In the race to the top, prices seem to have been driven by something inexplicable by neoclassical economics. In this paper we set out to investigate this phenomenon.
We first define the fundamental value as a calculation of the expected future cash flow accruing the asset, devout and value-expressive characteristics or reference to its market value. By travelling back in time and applying the most common vessel valuation models from 1996-2015, we get an estimation of the fundamental value of our chosen reference boat: a 1-2000 TEU handy size container vessel. Despite using two completely different models, the result in both cases reveal significantly lower fundamental values (prices of the vessels) compared to market prices during the shipping boom. Based on persistent and systematic deviations in market prices, we conclude that there is an irrational price element added to the assets fundamental value, because it is contrarian to homo economicus – the logically consistent economic man in neoclassic models.
By closely investigating the relationship between prices, earnings and investments, we empirically test the hypotheses that shipping firms over extrapolate exogenous demand shocks and partially neglect the endogenous investment response by competitors. We prove that investors value vessels as if they anticipate considerably less mean reversion in earnings than what we find in the actual data, supporting our extrapolative bias hypothesis. While both prices and investments negatively forecast excess returns, the investment coefficient is statistically insignificant in our sample, why we reject our hypothesis of competition neglect.
Based on our analysis, we conclude on the basis of rational choice theory that shipping is not a fully rational market. Our findings thus contribute to existing literature by proving that irrational exuberance is not confined to retail investors, but also thrives among institutional investors. We view this as a contribution to the current break-up with axioms of homo economicus. We go on to suggest improved methods for calculating the value of a containership based on our research. Rather than a magic formula, we arrive at different refined valuation methods for different purposes. The result allows firms to attenuate the impact of over extrapolation and prevent it from adversely affecting the valuation, more accurately estimate actual market prices for investor purposes and optimize profit as a function of cruising speed in relation to bunker cost.

Educations, (Graduate Programme) Final Thesis
Publication date2016
Number of pages129
SupervisorsFinn Østrup