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The Dynamic Behavior Of Efficient Timber Prices

Author

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  • McGough, Bruce
  • Plantinga, Andrew J.
  • Provencher, Bill

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.

Suggested Citation

  • McGough, Bruce & Plantinga, Andrew J. & Provencher, Bill, 2002. "The Dynamic Behavior Of Efficient Timber Prices," Staff Papers 12607, University of Wisconsin-Madison, Department of Agricultural and Applied Economics.
    • Handle: RePEc:ags:wisagr:12607
    DOI: 10.22004/ag.econ.12607
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    2. 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.
    3. Newell, Richard G. & Papps, Kerry L. & Sanchirico, James N., 2005. "Asset Pricing in Created Markets for Fishing Quotas," Discussion Papers 10639, Resources for the Future.
    4. Richard G. Newell & Kerry L. Papps & James N. Sanchirico, 2007. "Asset Pricing in Created Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(2), pages 259-272.
    5. Adriana Piazza & Bernardo Pagnoncelli, 2014. "The optimal harvesting problem under price uncertainty," Annals of Operations Research, Springer, vol. 217(1), pages 425-445, June.
    6. McGough Bruce & Plantinga Andrew J. & Costello Christopher, 2009. "Optimally Managing a Stochastic Renewable Resource under General Economic Conditions," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-31, December.
    7. Gong, Peichen & Löfgren, Karl-Gustaf, 2005. "Market and welfare implications of the reservation price strategy for forest harvest decisions," Umeå Economic Studies 664, Umeå University, Department of Economics.
    8. 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.
    9. 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(3), pages 1-23, December.

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    JEL classification:

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

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