On the Performance of Timberland as an Alternative Asset

The financial performance of timberland as an alternative asset is assessed by the intertemporal capital asset pricing model and Fama-MecBeth two-step regression method. In the analysis, alternative assets include emerging markets, hedge funds, private equity, venture capital, commodities, real estate, farmland and timberland; conventional assets include S&P 500 Index, Dow Jones Index, first, fourth, seventh, and tenth decile size portfolios of NYSE, AMEX, and NASDAQ listed stocks, 5- and 10-year Treasury bonds, and long-term AAA and BAA corporate bonds; and risk factors include market excess returns, term spread, default spread, personal consumption expenditures and inflation. Timberland return is found to be countercyclical, positively correlated with innovations in default spread, personal consumption expenditures and inflation, and negatively correlated with innovations in term spread. On a risk-adjusted basis, timberland shows superior performance than stocks and most other alternative assets. There is also evidence that alternative asset market is not integrated with conventional asset market as the risk premiums for these two asset groups differ significantly.