Diversification effect of ship investment funds in South Korea

Abstract

Purpose: The purpose of this paper is to examine the diversification effect of the Korean Ship Investment Fund (KSF) under Markowitz portfolio theory by analyzing short-term and long-term relationships with stocks and bonds. Design/methodology/approach: For this purpose, unit root, correlation and cointegration tests are performed. Monthly data from 2004 to 2015 for stocks, bonds and KSFs are obtained for this study. Findings: The correlation coefficients indicate that KSFs are uncorrelated with stocks and negatively correlated with bonds, and no long-term equilibrium relationships exist with all three variables by the Johansen and Engle-Granger cointegration tests. Research limitations/implications: This paper makes contribution to the literature as follows: first, whereas the previous literature investigated diversification effect of ship investment using freight indices or freight rates which are not able to represent returns from ship investment, this study is the first study to use actual stock prices of the KSFs to the authors’ best knowledge; and second, diversification effect of ship investment represented by KSFs is empirically verified in the both short term and long term. Practical implications: Policy-makers and managers of shipping companies can have sound ground that the KSFs are alternative and attractive assets to investors. It is also shown that the KSFs have potential to improve risk and return structure of investors on their own regardless of existence of incentives. Therefore, decisions of policy-makers can be made free from expectations for stronger incentives provided by the government. In addition, those countries that do not have such a ship investment platform may consider introducing a similar ship investment fund in order to revitalize the capital markets of the country. Originality/value: This study holds its significance in investigating diversification properties of the KSFs for the first time in Korea since the KSFs were introduced. © 2019, Korea Trade and Research Association.