Modeling the entrepreneurial investment decision in the containership segment: Second hand boxship purchase or placement of an order for a new build? The case of Panamax and Post-Panamax containerships

Shipping industry, and consequently liner shipping, is governed by a well-witnessed volatility that pervades on shipping investments. Especially after the booming years from 2003 and onwards, and the steep slump that followed, the market became extremely competitive and unstable. Some would say that the increased volatility of the market creates the attractiveness of the sector for investors as high risks usually bring along high yields. Nevertheless, there are several impacting determinants and cornerstones that need to be taken into consideration beforehand, from existing or new coming investors, who aim to rush into the excitement of investing in liner shipping industry. This study aims to quantify, based on quantitative analysis using the Eviews 8 software, the initial entrepreneurial investment decision in the containership segment: Second hand boxship purchase or placement of an order for a new build, specifically for the Panamax and Post-Panamax container vessels, after presenting a brief market research on the liner shipping industry. According to our opinion, as introduced initially for the tanker sector by Merikas (2008), what matters is not the second hand price and its determinants per se, but instead of this approach we constructed the functional relationship between second hand price over the new building price and its main determinants in the container sector. By following this path we can treat our dependent variable (Second-Hand Prices / New Building Prices) as; a useful tool for the initial investment decision between a second-hand containership and a newbuilding, and second of all as a mechanism for estimating the value of the asset for financial purposes. For the purpose of the research we gathered time series of raw data (prices of 5-year-old containerships, prices of newbuildings, Libor interest rates that represent a measure of entrance in the containership sector or further expansion, time charter rates for 1 year contracts, and the respective transaction volume) for the time period between 2002 and 2011. By applying the Maximum Likelihood Estimation we can imprint the parameters estimation for the variance equation, while the application of GARCH (1,1) will allow us to capture the volatility of the dependent variable (SHP/NBP), and consequently the risk proxy by the variance. Overall we can claim that the cyclical nature of the shipping industry, together with the expectations of the actors is substantially impacting on the movement of the ratio. A low SHP/NBP ratio depicts that ship owners see a growing market in the near future and can afford to wait for another two or three years until the delivery of the new vessel based on the assumption that the freight rate is not currently peaking, and vice versa.