The Term Structure of Second-hand Prices: A Structural Partial Equilibrium Model

Since the pioneering work of Koopmans (1939) and Mossin (1968) in Maritime Economics, the market for new vessels, the market for second-hand vessels, the freight rate market and finally the market for scrap have been considered as different markets where price is formed under the laws of supply and demand. In this paper, we consider the prices of new vessels and the charter rates as sufficient statistics for the value of second-hand vessels. Using modern finance theory, we derive a closed formula for the prices of second-hand vessels taking into consideration their Real Option value. We introduce two explanatory variables for second-hand prices and derive equilibrium prices in a partial equilibrium framework. Our model fits the data and provides some structural insight into the functional form of second-hand prices. Maritime Economics & Logistics (2003) 5, 251–267. doi:10.1057/palgrave.mel.9100084