Further generalization of Faustmann's formula for stochastic interest rates
Markov decision process (MDP) models generalize Faustmann's formula by recognizing that future stand states, prices, and interest rates, are not known exactly. Buongiorno (Forest Science 47(4) 2001) presents a dynamic programming and a linear programming formulation of the MDP model with a fixed interest rate. Both formulations are generalized here to account for a stochastic interest rate. The objective function is the expected present value of returns over an infinite horizon. It gives, like Faustmann's formula, the value of the land and the eventual standing trees. The changes between stand states, prices, and interest rate, are represented by Markov chains. Faustmann's formula is a special case where the change from one state to another has 0 or 1 probability, and the interest rate is constant. The MDP model applies to any stand state, even- or uneven-aged, and the best decisions are tied uniquely to the current system state. An example shows the effects of recognizing variations in interest rate on the land expectation value, and the cost of ignoring them.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 17 (2011)
Issue (Month): 3 (August)
|Contact details of provider:|| Web page: http://www.elsevier.com/wps/find/journaldescription.cws_home/701775/description#description|
|Order Information:|| Postal: http://www.elsevier.com/wps/find/journaldescription.cws_home/701775/bibliographic|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ching-Rong Lin & Joseph Buongiorno, 1998. "Tree Diversity, Landscape Diversity, and Economics of Maple-Birch Forests: Implications of Markovian Models," Management Science, INFORMS, vol. 44(10), pages 1351-1366, October.
- Alvarez, Luis H.R. & Koskela, Erkki, 2007.
"Optimal harvesting under resource stock and price uncertainty,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 31(7), pages 2461-2485, July.
- Luis H. R. Alvarez & Erkki Koskela, 2005. "Optimal Harvesting under Resource Stock and Price Uncertainty," CESifo Working Paper Series 1384, CESifo Group Munich.
- C. Robert Taylor, 1984. "Stochastic Dynamic Duality: Theory and Empirical Applicability," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 66(3), pages 351-357.
- Alvarez, Luis H.R. & Koskela, Erkki, 2003.
"On Forest Rotation Under Interest Rate Variability,"
840, The Research Institute of the Finnish Economy.
- Alvarez, Luis H R & Koskela, Erkki, 2003. "On Forest Rotation under Interest Rate Variability," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(4), pages 489-503, August.
- Miller, Robert A. & Voltaire, Karl, 1980. "A sequential stochastic tree problem," Economics Letters, Elsevier, vol. 5(2), pages 135-140.
- Harry R Clarke & William J. Reed, 1989.
"The Tree-Cutting Problem in a Stochastic Environment: The case of Age Dependent Growth,"
1989.01, School of Economics, La Trobe University.
- Clarke, Harry R. & Reed, William J., 1989. "The tree-cutting problem in a stochastic environment : The case of age-dependent growth," Journal of Economic Dynamics and Control, Elsevier, vol. 13(4), pages 569-595, October.
- Harry R Clarke & William J. Reed, 1989. "The Tree-Cutting Problem in a Stochastic Environment: The case of Age Dependent Growth," Working Papers 1989.01 EDIRC Provider-In, School of Economics, La Trobe University.
- Thomas A. Thomson, 1992. "Optimal Forest Rotation When Stumpage Prices Follow a Diffusion Process," Land Economics, University of Wisconsin Press, vol. 68(3), pages 329-342.
- Margaret Insley & Kimberly Rollins, 2005. "On Solving the Multirotational Timber Harvesting Problem with Stochastic Prices: A Linear Complementarity Formulation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(3), pages 735-755.
- Miller, Robert A. & Voltaire, Karl, 1983. "A stochastic analysis of the tree paradigm," Journal of Economic Dynamics and Control, Elsevier, vol. 6(1), pages 371-386, September.
When requesting a correction, please mention this item's handle: RePEc:eee:foreco:v:17:y:2011:i:3:p:248-257. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.