Journal of Forest Economics > Vol 12 > Issue 3

Does risk aversion accelerate optimal forest rotation under uncertainty?

Luis H.R. Alvarez, , luis.alvarez@tukkk.fi Erkki Koskela, , erkki.koskela@helsinki.fi
 
Suggested Citation
Luis H.R. Alvarez and Erkki Koskela (2006), "Does risk aversion accelerate optimal forest rotation under uncertainty?", Journal of Forest Economics: Vol. 12: No. 3, pp 171-184. http://dx.doi.org/10.1016/j.jfe.2006.06.001

Published: 04 Dec 2006
© 0 2006 Luis H.R. Alvarez, Erkki Koskela
 
Subjects
 
Keywords
JEL Codes:Q23G31C61
Forest rotationRisk aversionStochastic interest ratesOptimal stopping
 

Article Help

Share

Download article
In this article:
Introduction
Optimal forest rotation under interest rate and forest stand value uncertainty
Conclusion

Abstract

We use a Wicksellian single rotation framework to analyze the impact of a stochastic mean-reverting interest rate process on the optimal harvesting threshold and thereby the expected length of the rotation period, when the forest stand value follows a geometric Brownian motion and landowners are risk-averse. We solve explicitly the two-dimensional path-dependent rotation problem and demonstrate that higher interest rate volatility increases, while higher risk aversion decreases, the optimal harvesting threshold. Under risk aversion higher forest value volatility decreases the optimal harvesting threshold, while it has no effect under risk neutrality. Numerical illustrations indicate that higher interest rate volatility will raise the expected rotation period at an increasing rate, while higher forest value volatility will decrease its sensitivity under risk aversion.

DOI:10.1016/j.jfe.2006.06.001