Impact of risk aversion on the optimal rotation with stochastic price
2008 (English)In: Natural Resource Modeling, ISSN 0890-8575, E-ISSN 1939-7445, Vol. 21, no 3, 385-415 p.Article in journal (Refereed) PublishedText
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.
Place, publisher, year, edition, pages
Oxford: Blackwell Publishing, 2008. Vol. 21, no 3, 385-415 p.
even-aged stand management, price uncertainty, mean-variance approach, open-loop control
Environmental Sciences Ecology Mathematics
IdentifiersURN: urn:nbn:se:umu:diva-117486DOI: 10.1111/j.1939-7445.2008.00017.xISI: 000258078800003OAI: oai:DiVA.org:umu-117486DiVA: diva2:909605