Valuation of Timber Harvesting Options Using a Contingent Claims Approach
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.
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.:
- Junsoo Lee & John A. List & Mark Strazicich, 2005.
"Nonrenewable Resource Prices: Deterministic or Stochastic Trends?,"
NBER Working Papers
11487, National Bureau of Economic Research, Inc.
- Lee, Junsoo & List, John A. & Strazicich, Mark C., 2006. "Non-renewable resource prices: Deterministic or stochastic trends?," Journal of Environmental Economics and Management, Elsevier, vol. 51(3), pages 354-370, May.
- Junsoo Lee & John A. List & Mark C. Strazicich, 2005. "Nonrenewable Resource Prices: Deterministic or Stochastic Trends?," Working Papers 05-20, Department of Economics, Appalachian State University.
- Duku-Kaakyire, Armstrong & Nanang, David M., 2004. "Application of real options theory to forestry investment analysis," Forest Policy and Economics, Elsevier, vol. 6(6), pages 539-552, October.
- 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.
- Gjolberg, Ole & Guttormsen, Atle G., 2002. "Real options in the forest: what if prices are mean-reverting?," Forest Policy and Economics, Elsevier, vol. 4(1), pages 13-20, May.
- 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.
- Kothari, S P & Shanken, Jay & Sloan, Richard G, 1995. " Another Look at the Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 185-224, March.
- Bates, David S, 1991. " The Crash of '87: Was It Expected? The Evidence from Options Markets," Journal of Finance, American Finance Association, vol. 46(3), pages 1009-44, July.
- Insley, Margaret, 2002. "A Real Options Approach to the Valuation of a Forestry Investment," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 471-492, November.
- Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474.
When requesting a correction, please mention this item's handle: RePEc:uwp:landec:v:85:y:2009:i:4:p:655-674. 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: ()
If references are entirely missing, you can add them using this form.