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Research article2008Peer reviewed

Impact of risk aversion on the optimal rotation with stochastic price

Gong, Peichen; Loefgren, Karl-Gustaf

Abstract

This paper examines the effect of risk aversion on the optimal rotation when the stumpage price is stochastic. Assuming that the stumpage price is normally distributed, we show that the optimal rotation under risk aversion may be shorter than, equal to, or longer than the corresponding optimal rotation under risk neutrality. Which of these cases holds true depends on the interest rate and the real regeneration cost, and can be determined based on the marginal variance (i.e., the derivative of the variance function with respect to rotation age) evaluated at the optimal rotation under risk neutrality. Furthermore, we show that there exists a monotone continuous curve, which divides the interest rate-regeneration cost space into two regions where risk aversion affects the optimal rotation differently. For a given interest rate, risk aversion shortens (prolongs) the optimal rotation if the regeneration cost lies below (above) the curve. Along the separating curve the optimal rotation under risk aversion coincides with the optimal rotation under risk neutrality. Two examples are presented to demonstrate the separating curve and the impacts of risk aversion on the optimal rotation.

Keywords

even-aged stand management; price uncertainty; mean-variance approach; open-loop control

Published in

Natural Resource Modeling
2008, Volume: 21, number: 3, pages: 385-415 Publisher: BLACKWELL PUBLISHING

      SLU Authors

      UKÄ Subject classification

      Forest Science

      Publication identifier

      DOI: https://doi.org/10.1111/j.1939-7445.2008.00017.x

      Permanent link to this page (URI)

      https://res.slu.se/id/publ/18992