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Valuation of Timber Harvesting Options Using a Contingent Claims Approach

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  • Rajendra Prasad Khajuria
  • Shashi Kant
  • Susanna Laaksonen-Craig

Abstract

The contingent-claims-based real options theory is used to value timber harvesting options in Ontario, Canada. Monthly prices from 1981 to 2006 are used for analysis, and different statistical tests, including structural breaks, are used to test the stationarity of prices. The tests show the presence of structural breaks and jumps in the price series. The price series is stationary after incorporating the structural breaks, and therefore a mean reversion with jumps process, and not geometric Brownian motion, is used to characterize the prices. The presence of structural breaks requires partitioning of the series into three subperiods. Results indicate that ignoring the structural breaks and jumps will lead to suboptimal investment decisions. Results also imply the need to revise even-volume harvesting and fixed rotation age policies in forestry for economically efficient decisions.

Suggested Citation

  • Rajendra Prasad Khajuria & Shashi Kant & Susanna Laaksonen-Craig, 2009. "Valuation of Timber Harvesting Options Using a Contingent Claims Approach," Land Economics, University of Wisconsin Press, vol. 85(4), pages 655-674.
    • Handle: RePEc:uwp:landec:v:85:y:2009:i:4:p:655-674
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    Cited by:

    1. Stanislav Petrasek & John Perez-Garcia & B. Bare, 2015. "Valuing forestlands with stochastic timber and carbon prices," Annals of Operations Research, Springer, vol. 232(1), pages 217-234, September.
    2. James Tee & Riccardo Scarpa & Dan Marsh & Graeme Guthrie, 2014. "Forest Valuation under the New Zealand Emissions Trading Scheme: A Real Options Binomial Tree with Stochastic Carbon and Timber Prices," Land Economics, University of Wisconsin Press, vol. 90(1), pages 44-60.
    3. Diekmann, Anton & Wolbert-Haverkamp, Matthias & Mußhoff, Oliver, 2014. "Die Bewertung der Umstellung einer einjährigen Ackerkultur auf den Anbau von Miscanthus – Eine Anwendung des Realoptionsansatzes," Department of Agricultural and Rural Development (DARE) Discussion Papers 260812, Georg-August-Universitaet Goettingen, Department of Agricultural Economics and Rural Development (DARE).
    4. Tee, James & Scarpa, Riccardo & Marsh, Dan & Guthrie, Graeme, 2012. "Valuation of Carbon Forestry and the New Zealand Emissions Trading Scheme: A Real Options Approach Using the Binomial Tree Method," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 131066, International Association of Agricultural Economists.
    5. Adriana Piazza & Bernardo Pagnoncelli, 2015. "The stochastic Mitra–Wan forestry model: risk neutral and risk averse cases," Journal of Economics, Springer, vol. 115(2), pages 175-194, June.
    6. Khan, M. Ali, 2016. "On a forest as a commodity and on commodification in the discipline of forestry," Forest Policy and Economics, Elsevier, vol. 72(C), pages 7-17.

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    More about this item

    JEL classification:

    • Q23 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Forestry
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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