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- Title
Hedges and Trees: Incorporating Fire Risk into Optimal Decisions in Forestry Using a No-Arbitrage Approach.
- Authors
Insley, Margaret; Lei, Manle
- Abstract
This paper investigates the impact of including the risk of fire in an optimal tree harvesting model at the stand level, assuming timber prices follow a mean-reverting stochastic process. The relevant partial differential equation is derived under different assumptions about hedging the risk of fire. The assumption that fire risk is fully diversifiable is contrasted with the assumption that it can be hedged with another asset. It is conjectured that the risk-neutral probability of fire exceeds the historical probability of fire, which will affect forest land valuation. An empirical example is presented for two different silvicultural regimes.
- Subjects
VALUATION of forests; POISSON brackets; DIFFERENTIAL equations; BESSEL functions; PROBABILITY theory
- Publication
Journal of Agricultural & Resource Economics, 2007, Vol 32, Issue 3, p492
- ISSN
1068-5502
- Publication type
Article