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
To order: fax (+47) 6494 3012 or e-mail: ior@ior.nlh.no
|