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Journal #J-01/2002
Real options in the forest: what if prices are mean-reverting
Ole Gjølberg & Atle Guttormsen
Department of Economics & Social Sciences
Agricultural University of Norway
PO Box 5033, N-1432 Ås, Norway
http://www.nlh.no/ior/
e-mail: atle.guttormsen@ior.nlh.no  

Guttormsen, A. & O. Gjølberg (2002): "Real options in the forest: what if prices are mean-reverting", Forest Policy and Economics, 4(1):13-20

Abstract:
When solving the Faustmann problem in a stochastic setting, it is typically assumed that prices follow a random walk process. In the present paper, we instead assume that timber prices are mean-reverting. We take a real-option approach to the cutting problem and discuss what consequences mean-reverting prices will have compared to the traditional random-walk assumption. One conclusion is that what traditionally has been seen as irrational pricing with discount rates that are too low may represent rational pricing of relatively low-risk, long-term investments.

Key words: Forest valuation; Rotation; Real options; Mean reversion

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Institutt for økonomi og ressursforvaltning
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