An Application of Dynamic Factor Model to Dry Bulk Market

Abstract

BDI actually has weighed more on larger-size market. So, calculating the synchronicity of dry bulk sub-markets by using BDI as reference indicator could lead to mistake. Therefore, for the analysis of synchronicity and idiosyncrasy of dry bulk markets, this paper constructs a dynamic factor model of the change rate of BDI’s constituting indices and then it performs maximum likelihood estimation. One important finding is that, for such larger ships as Capesize and Panamax, there has been a significant increase in their synchronicity with global common factor after the 2008 global financial crisis, but for the other smaller ships, the opposite phenomenon has been observed. This paper suggests two important future research topics. One is extending the suggested dynamic factor model with the structural change (regime switching). The other is constructing a new index for the level, not the change rate, of the status of global dry bulk market. The author believes that the combination of these issues could produce an alternative index to BDI.