Price Risk Modelling of Different Size Vessels in the Tanker Industry Using Autoregressive Conditional Heteroskedasticity (ARCH) Models

Abstract

This paper examines volatility as a measure of risk in the world tanker market for second hand ships. In particular, it models and compares time varying risks between different size vessels. The recently developed class of Autoregressive Conditional Heteroskedasticity (ARCH) models are utilised for this purpose. It is found that monthly price returns of small vessels are broadly less volatile than larger ones, and the nature of these volatilities vary across sizes. A downward trend in risks is observed in the VLCC and Suezmax carriers, suggesting that risks in the tanker industry have decreased since the first part of the 1980's.