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Hedging with Trees: Tail-Hedge Discounting of Long-Term Forestry Returns

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  • Hultkrantz, Lars

    (Örebro University School of Business)

  • Mantalos, Panagiotis

    (Department of Economics and Statistics, School of Business and Economics Linnaeus University)

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 in three forestry cases that the result considerably changes the expected present value of long-term forestry investments.

Suggested Citation

  • Hultkrantz, Lars & Mantalos, Panagiotis, 2016. "Hedging with Trees: Tail-Hedge Discounting of Long-Term Forestry Returns," Working Papers 2016:2, Örebro University, School of Business.
    • Handle: RePEc:hhs:oruesi:2016_002
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    References listed on IDEAS

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    Cited by:

    1. Lars Hultkrantz, 2021. "Discounting in economic evaluation of healthcare interventions: what about the risk term?," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 22(3), pages 357-363, April.
    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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