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Hedging with trees: Tail-hedge discounting of long-term forestry returns

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  • Hultkrantz, Lars
  • Mantalos, Panagiotis

Abstract

Tail-hedge discounting is based on decomposition of returns from long-term investments in a fraction (gamma) that is correlated with consumption and another that is not. The first part is discounted at a discount rate that includes a risk premium, the other with the risk-free rate. We estimate gamma for forestry on Swedish data for stumpage prices and GDP per capita 1909–2012. We demonstrate that the result considerably changes the expected present value of medium-term and long-term forest investments.

Suggested Citation

  • Hultkrantz, Lars & Mantalos, Panagiotis, 2018. "Hedging with trees: Tail-hedge discounting of long-term forestry returns," Journal of Forest Economics, Elsevier, vol. 30(C), pages 52-57.
    • Handle: RePEc:eee:foreco:v:30:y:2018:i:c:p:52-57
    DOI: 10.1016/j.jfe.2018.02.001
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    Cited by:

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    2. Kathrin Goldmann, 2019. "Time-declining risk-adjusted social discount rates for transport infrastructure planning," Transportation, Springer, vol. 46(1), pages 17-34, February.
    3. Panagiotis Mantalos & Lars Hultkrantz, 2018. "Estimating ‘gamma’ for tail-hedge discount rates when project returns are cointegrated with GDP," Applied Economics, Taylor & Francis Journals, vol. 50(37), pages 4074-4085, August.

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    More about this item

    Keywords

    Discounting; Far‐distant future; Declining discount rates; Forestry; Forest economics; Cost‐benefit analysis;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • Q23 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Forestry

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