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Forest planning and productivity-risk trade-off through the Markowitz mean-variance model

Author

Listed:
  • Antonello Lobianco

    (Laboratoire d'Economie Forestière, INRA - AgroParisTech)

  • Arnaud Dragicevic

    (Chaire Forêts pour Demain, AgroParisTech-Office National des Forêts)

  • Antoine Leblois

    (Laboratoire d'Economie Forestière, INRA - AgroParisTech)

Abstract

Using the Markowitz mean-value (M-V) portfolio model, we study forest planning looking at arbitration between productivity and risk. By weighting the forest productivity with factors of future climate change effects, we compute the optimal tree species mixes, within reach of forest managers, in ninety French administrative departments. Considering three productivity measures (wood production, carbon sequestration and economic valorization) and their respective variances, we found that: a) optimizing productivity and carbon sequestration yields allocations close to the empirical ones; b) forest managers prefer low variance to high productivity, i.e. their revealed risk aversion is high; and c) unlike maximizing wood productivity or carbon sequestration, which lead to similar portfolios, maximizing the economic value of wood production increases (decreases) wood production and carbon sequestration under risk aversion (neutrality). Under high risk aversion, the economic valorization would lead to a high species specialization, which is very unlikely in reality. In all considered scenarios, the objectives set out in the Kyoto Protocol would be attained, which puts into question its relevance in terms of additionality.

Suggested Citation

  • Antonello Lobianco & Arnaud Dragicevic & Antoine Leblois, 2015. "Forest planning and productivity-risk trade-off through the Markowitz mean-variance model," Working Papers - Cahiers du LEF 2015-07, Laboratoire d'Economie Forestiere, AgroParisTech-INRA, revised Jul 2015.
  • Handle: RePEc:lef:wpaper:2015-07
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    File URL: http://www6.nancy.inra.fr/lef/Cahiers-du-LEF/2015/2015-07
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    References listed on IDEAS

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    1. Marielle Brunette & Arnaud Dragicevic & Jonathan Lenglet & Alexandra Niedzwiedz & Vincent Badeau & Jean-Luc Dupouey, 2014. "Portfolio Management of Mixed-Species Forests," Post-Print hal-01628375, HAL.
    2. Newman, D.H., 2002. "Forestry's golden rule and the development of the optimal forest rotation literature," Journal of Forest Economics, Elsevier, vol. 8(1), pages 5-27.
    3. Lecocq, Franck & Caurla, Sylvain & Delacote, Philippe & Barkaoui, Ahmed & Sauquet, Alexandre, 2011. "Paying for forest carbon or stimulating fuelwood demand? Insights from the French Forest Sector Model," Journal of Forest Economics, Elsevier, vol. 17(2), pages 157-168, April.
    4. Knoke, Thomas, 2008. "Mixed forests and finance -- Methodological approaches," Ecological Economics, Elsevier, vol. 65(3), pages 590-601, April.
    5. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    6. Wan, Yang & Clutter, Michael L. & Mei, Bin & Siry, Jacek P., 2015. "Assessing the role of U.S. timberland assets in a mixed portfolio under the mean-conditional value at risk framework," Forest Policy and Economics, Elsevier, vol. 50(C), pages 118-126.
    7. Merton, Robert C., 1972. "An Analytic Derivation of the Efficient Portfolio Frontier," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 7(4), pages 1851-1872, September.
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    Cited by:

    1. Nahuel Bautista & Bruno D. V. Marino & J. William Munger, 2021. "Science to Commerce: A Commercial-Scale Protocol for Carbon Trading Applied to a 28-Year Record of Forest Carbon Monitoring at the Harvard Forest," Land, MDPI, Open Access Journal, vol. 10(2), pages 1-22, February.
    2. Dragicevic, Arnaud Z., 2019. "Rethinking the forestry in the Aquitaine massif through portfolio management," Forest Policy and Economics, Elsevier, vol. 109(C).
    3. Wildberg, Johannes & Möhring, Bernhard, 2019. "Empirical analysis of the economic effect of tree species diversity based on the results of a forest accountancy data network," Forest Policy and Economics, Elsevier, vol. 109(C).
    4. Friedrich, Stefan & Paul, Carola & Brandl, Susanne & Biber, Peter & Messerer, Katharina & Knoke, Thomas, 2019. "Economic impact of growth effects in mixed stands of Norway spruce and European beech – A simulation based study," Forest Policy and Economics, Elsevier, vol. 104(C), pages 65-80.

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    More about this item

    Keywords

    bioeconomics; forest planning; mean-variance model; mixed-species forests; climate Change;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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