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Timber Harvesting as a Part of the Portfolio Management: A Multiperiod Stochastic Optimisation Approach

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  • Veli-Pekka Heikkinen

    (Varma-Sampo Mutual Pension Insurance Company, P.O. Box 1, 00098 Varma-Sampo, Helsinki, Finland)

Abstract

A multiperiod stochastic optimization model is formulated for a land owner who can speculate between investing harvesting income in financial assets and postponing harvesting. This paper demonstrates the benefits from using a multiperiod model, the effects of cointegration on optimal portfolio, and the differences between the timber harvesting model and the standard financial portfolio optimisation model. The demonstrations are made partly by using a real Finnish forest and price data, and partly by using artificial data. In the real data example, the system is demonstrated using a case where it is assumed that the land owner has several mature forest stands, which can be harvested at any time during the next 3 years. Investment alternatives are stocks, government bonds, and bank deposits. The forestry returns were defined as a sum of exponential physical growth and stumpage price return. The chosen definition of forestry returns makes the model very useful, for example, when speculating on what speed of physical growth is needed to make forestry a competitive investment alternative when both returns and risks are considered.

Suggested Citation

  • Veli-Pekka Heikkinen, 2003. "Timber Harvesting as a Part of the Portfolio Management: A Multiperiod Stochastic Optimisation Approach," Management Science, INFORMS, vol. 49(1), pages 131-142, January.
    • Handle: RePEc:inm:ormnsc:v:49:y:2003:i:1:p:131-142
    DOI: 10.1287/mnsc.49.1.131.12752
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    References listed on IDEAS

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    1. Courtland L. Washburn & Clark S. Binkley, 1990. "On the Use of Period-Average Stumpage Prices to Estimate Forest Asset Pricing Models," Land Economics, University of Wisconsin Press, vol. 66(4), pages 379-393.
    2. Clair H. Redmond & Frederick W. Cubbage, 1988. "Portfolio Risk and Returns from Timber Asset Investments," Land Economics, University of Wisconsin Press, vol. 64(4), pages 325-337.
    3. Raunikar, Ronald & Buongiorno, Joseph & Prestemon, Jeffrey P. & Lee Abt, Karen, 2000. "Financial performance of mixed-age naturally regenerated loblolly-hardwood stands in the south central United States," Forest Policy and Economics, Elsevier, vol. 1(3-4), pages 331-346, December.
    4. Laurence Reeves & Robert Haight, 2000. "Timber harvest scheduling with price uncertainty using Markowitz portfolio optimization," Annals of Operations Research, Springer, vol. 95(1), pages 229-250, January.
    5. W. L. Mills, Jr. & William L. Hoover, 1982. "Investment in Forest Land: Aspects of Risk and Diversification," Land Economics, University of Wisconsin Press, vol. 58(1), pages 33-51.
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    Cited by:

    1. Miguel A. Lejeune & Janne Kettunen, 2017. "Managing Reliability and Stability Risks in Forest Harvesting," Manufacturing & Service Operations Management, INFORMS, vol. 19(4), pages 620-638, October.
    2. Roessiger, Joerg & Griess, Verena C. & Härtl, Fabian & Clasen, Christian & Knoke, Thomas, 2013. "How economic performance of a stand increases due to decreased failure risk associated with the admixing of species," Ecological Modelling, Elsevier, vol. 255(C), pages 58-69.
    3. Hildebrandt, Patrick & Knoke, Thomas, 2011. "Investment decisions under uncertainty--A methodological review on forest science studies," Forest Policy and Economics, Elsevier, vol. 13(1), pages 1-15, January.
    4. Miguel A. Lejeune & Janne Kettunen, 2018. "A fractional stochastic integer programming problem for reliability-to-stability ratio in forest harvesting," Computational Management Science, Springer, vol. 15(3), pages 583-597, October.
    5. Hyytiainen, Kari & Penttinen, Markku, 2008. "Applying portfolio optimisation to the harvesting decisions of non-industrial private forest owners," Forest Policy and Economics, Elsevier, vol. 10(3), pages 151-160, January.

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