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The Dynamic Behavior of Efficient Timber Prices

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  • McGough, Bruce

    (Oregon State U)

  • Plantinga, Andrew J.
  • Provencher, William

    (U of Wisconsin)

Abstract

The problem of when to optimally harvest trees when timber prices evolve according to an exogenous stochastic process has been studied extensively in recent decades. However, little attention has been given to the appropriate form of the stochastic process for timber prices, despite the fact that the choice of a process has important effects on optimal harvesting decisions. We develop a simple theoretical model of a timber market and show that there exists a rational expectations equilibrium in which prices evolve according to a stationary ARMA(1,1) process. Simulations are used to analyze a model with a more general representation of timber stock dynamics and to demonstrate that the unconditional distribution for rational timber prices is asymmetric. Implications for the optimal harvesting literature are: 1) market efficiency provides little justification for random walk prices, 2) unit root tests, used to analyze the informational efficiency of timber markets, do not distinguish between efficient and inefficient markets, and 3) failure to recognize asymmetric disturbances in time-series analyses of historical timber prices can lead to sub-optimal harvesting rules.

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Bibliographic Info

Paper provided by University of Wisconsin, Agricultural and Applied Economics in its series Staff Paper Series with number 454.

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Date of creation: Oct 2002
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Handle: RePEc:ecl:wisagr:454

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  9. LeRoy, Stephen F, 1989. "Efficient Capital Markets and Martingales," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1583-1621, December.
  10. Jean-Daniel Saphores & Lynda Khalaf & Denis Pelletier, 2002. "On Jumps and ARCH Effects in Natural Resource Prices: An Application to Pacific Northwest Stumpage Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(2), pages 387-400.
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Cited by:
  1. Gong, Peichen & Löfgren, Karl-Gustaf, 2005. "Market and welfare implications of the reservation price strategy for forest harvest decisions," UmeÃ¥ Economic Studies 664, Umeå University, Department of Economics.
  2. Sanchirico, James & Newell, Richard & Papps, Kerry, 2005. "Asset Pricing in Created Markets for Fishing Quotas," Discussion Papers dp-05-46, Resources For the Future.
  3. Gong, Peichen & Löfgren, Karl Gustaf, 2007. "Market and welfare implications of the reservation price strategy for forest harvest decisions," Journal of Forest Economics, Elsevier, vol. 13(4), pages 217-243, November.
  4. Manley, Bruce & Niquidet, Kurt, 2010. "What is the relevance of option pricing for forest valuation in New Zealand?," Forest Policy and Economics, Elsevier, vol. 12(4), pages 299-307, April.
  5. Insley, Margaret & Lei, Manle, 2007. "Hedges and Trees: Incorporating Fire Risk into Optimal Decisions in Forestry Using a No-Arbitrage Approach," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 32(03), December.

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