Optimal Forest Rotation When Stumpage Prices Follow a Diffusion Process

Thomas A. Thomson

Land Economics, 1992, vol. 68, issue 3, 329-342

Abstract: A key assumption in the Faustmann rule for financial maturity is that stumpage prices are constant over time. Timber price series, however, exhibit wide fluctuations over time which this paper models as a lognormal diffusion process. Comparing the diffusion results modeled here to the fixed-price Faustmann results show: (1) the prescribed rotation length is generally longer; (2) computed stand values are higher using the diffusion model with the greatest divergence occurring when a stand is about the midpoint of a rotation; (3) as the stumpage price volatility increases, the gain in computed NPV increases, though in a nonlinear fashion.

Date: 1992
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