Managers can improve their investment decisions in a cyclical market, such as the tanker market, by using system-dynamics models. We developed and implemented a system-dynamics model for the tanker market for Niver Lines. We combine entry, exit, and lay-up decisions, and determine the flow of transportation supply. Then, we compare supply and demand and calibrate the system. We derived time-charter rates from the interaction of supply and demand using historical data from 1980 through 2002. Our results reveal the key factors that affect tanker rates and unforeseen dynamics. The model is a powerful tool for modeling the impact of changes in various factors on time-charter rates.

A system identification approach is used in order to model and identify the structural relationship between freight rates in the tanker industry and a set of exogenous inputs. Our motivation results from the limited data availability and the prohibitive theoretical complexity of economic models for the evaluation of managerial decisions and risk management. The combination of statistical analysis and economic insight leads to an innovative multidisciplinary approach for modelling competitive economic systems. We calibrate the model with real data from 1980–2002, achieve estimation and identification of the system and fully track the directional changes in freight rates. After conducting performance evaluation an innovative hybrid model is introduced and system performance is maximized both within and out‐of‐sample. Finally we discuss potential uses of this model for policy analysis, managerial investment decisions and risk management. Copyright © 2007 John Wiley & Sons, Ltd.