Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/18923
Authors: 
Alvarez, Luis H. R.
Koskela, Erkki
Year of Publication: 
2004
Series/Report no.: 
CESifo Working Paper 1285
Abstract: 
We use a Wicksellian single rotation framework to analyze the impact of the intertemporally fluctuating and stochastic mean-reverting interest rate process on the optimal harvesting threshold and thereby the expected length of the rotation period, when forest value is also stochastic following geometric Brownian motion and landowners are risk-averse. We provide an explicit solution for the two-dimensional path-dependent rotation problem and demonstrate that higher interest rate volatility increases, while higher risk aversion decreases the optimal harvesting threshold. Moreover, under risk aversion increased 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.
Subjects: 
forest rotation
risk aversion
stochastic interest rates
optimal stopping
JEL: 
Q23
G31
C61
Document Type: 
Working Paper

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