A stochastic freight rate approach to valuation of crude tanker companies

Abstract

This thesis aims to develop a stochastic valuation model for the shipping industry, incorporating an Ornstein-Uhlenbeck process by capturing the meanreverting dynamics of freight rates. It examines the theoretical foundation underlying the mean-reverting processes, and project revenue by applying the Monte Carlo simulation method to freight rates. We find empirical evidence that historical freight rates are stationary, and literature supporting its meanreverting properties. The model’s validity is tested through a valuation of several shipping companies. We conclude that the results are ambiguous when using the market value as benchmark, due to limitations in the projections of capital structure as illustrated in the sensitivity analysis. The thesis has developed a first step for a new valuation approach of crude oil tankers.