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Stochastic Dominance Portfolio Analysis of Forestry Assets

Author

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  • V.-P. Heikkinen

    (Varma-Sampo Mutual Pension Insurance Company, Finland)

  • & Timo Kuosmanen

    (Wageningen University, The Netherlands)

Abstract

We consider the forestry decision-making and harvesting problem from the perspective of financial portfolio management, where harvestable forest stands constitute one of the liquid assets of the portfolio. Using real data from Finnish mixed borealis forests and from the Helsinki stock exchange, we investigate the effect of trading the timber stock together with the forest land, or without the land (i.e., harvesting), on the portfolio efficiency. As our research methodology, we utilize the general Stochastic Dominance (SD) criteria, focusing on the recent theoretical advances in analyzing portfolio diversification within the SD framework. Our findings shed some further light on the question of how to model the forestry planning problem, and provide some comparative evidence of the applicability of the alternative SD test approaches.

Suggested Citation

  • V.-P. Heikkinen & & Timo Kuosmanen, 2002. "Stochastic Dominance Portfolio Analysis of Forestry Assets," Finance 0210002, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0210002
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    References listed on IDEAS

    as
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    3. Timo Kuosmanen, 2001. "Stochastic Dominance Efficiency Tests under Diversification," Finance 0105001, University Library of Munich, Germany.
    4. Post, G.T., 2001. "Testing for Stochastic Dominance with Diversification Possibilities," ERIM Report Series Research in Management ERS-2001-38-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
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    7. Laurence Reeves & Robert Haight, 2000. "Timber harvest scheduling with price uncertainty using Markowitz portfolio optimization," Annals of Operations Research, Springer, vol. 95(1), pages 229-250, January.
    8. Porter, R. Burr & Pfaffenberger, Roger C., 1975. "Efficient Algorithms for Conducting Stochastic Dominance Tests on Large Numbers of Portfolios: Reply," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 10(1), pages 181-185, March.
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    Citations

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    Cited by:

    1. Knoke, Thomas, 2008. "Mixed forests and finance -- Methodological approaches," Ecological Economics, Elsevier, vol. 65(3), pages 590-601, April.
    2. Timo Kuosmanen, 2007. "Performance measurement and best-practice benchmarking of mutual funds: combining stochastic dominance criteria with data envelopment analysis," Journal of Productivity Analysis, Springer, vol. 28(1), pages 71-86, October.
    3. Hildebrandt, Patrick & Knoke, Thomas, 2011. "Investment decisions under uncertainty--A methodological review on forest science studies," Forest Policy and Economics, Elsevier, vol. 13(1), pages 1-15, January.

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    More about this item

    Keywords

    Forest Management; Portfolio Optimization; Stochastic Dominance; Diversification;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
    • Q23 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Forestry
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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