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Income Uncertainty and the Decision to Invest in Bulk Shipping

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Document pages: 50 pages

Abstract: We develop a coherent framework for the valuation of real assets and determination of the optimal time to invest. To this end, we model the stochastic nature of income and develop methodologies for valuing traded derivatives to facilitate model calibration. A valuation paradigm for freight-linked assets is then presented and, using a real option approach, we demonstrate its usefulness in investment appraisal and optimal timing of entry in the shipping industry. We find that long-run freight rate and volatility have an impact on the decision timing and value of the investment that diminishes with increasing vessel age. As time to build declines, the value of the option to wait increases implying a high opportunity cost embedded in the investment decision due to construction lags.

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