on jumps and arch effects in natural resource prices an application to pacific northwest stumpage prices continuous time models of natural resource prices usually preclude the possibility of large changes jumps resulting from unexpected events to test for the presence of jumps and or arch effects we combine bounds and the monte carlo test technique to obtain finite sample level exact p values we apply this methodology to stumpage prices from the pacific northwest and find evidence of jumps and arch effects to assess the impact of neglecting jumps on the decision to harvest old growth timber we develop an autonomous infinite horizon stopping model for which we provide a new method of resolution our numerical results show the importance of modeling jumps explicitly copyright 2002 oxford university press

a real options approach to the valuation of a forestry investment abstract the theory of real options is used to model the optimal tree harvesting decision the value of the option to harvest is estimated using a dynamic programming approach and a general numerical solution technique suitable for any type of stochastic process for prices the conditions under which the optimal harvest time is independent of price are examined in addition the impact of assuming future lumber prices are mean reverting is considered it is found that option value and optimal cutting time are significantly different under the mean reversion assumption compared to geometric brownian motion

the tree cutting problem in a stochastic environment the case of age dependent growth abstract harvest policies are derived for growing biological assets e g forests livestock subject to stochastic age dependent growth and price uncertainty the task posed is analyzed as a continuous time optimal stopping problem for diffusion processes both single and ongoing rotation problems are considered qualitative comparative static and numerical results are provided

leveraged investments and agency conflicts when cash flows are mean reverting we analyse the effect of mean reverting cash flows on the costs of shareholder bondholder conflicts arising from partially debt financed investments in a partial equilibrium setting we find that such agency costs are significantly lower under mean reverting mr dynamics when compared to the ubiquitous geometric brownian motion gbm the difference is attributed to the stationarity of the mr process in addition through the application of a novel agency cost decomposition we show that for a larger speed of mean reversion agency costs are driven mainly by suboptimal timing decisions as opposed to suboptimal financing decisions in contrast under the standard gbm assumption the agency costs are driven mainly by suboptimal financing decisions for large growth rates and by suboptimal timing decisions for smaller or negative growth rates

an equilibrium analysis of hedging with liquidity constraints speculation and government price subsidy in a commodity market we develop a simple commodity model to analyze i the effects of hedgying with liquidity constraints due to producers inability to bear unlimited trading losses ii the role of speculation in the process of risk allocation between consumers and producers and iii the equilibrium implications of government price subsidies to the producers we find that 1 liquidity constraints can cause futures prices to exhibit mean reversion which then makes speculation profitable 2 speculation tends to make futures price volatility an increasing function of futures price and 3 government price subsidy if actively hedged by the producers serves to lower the futures risk premium and reduce futures volatility commodity spot and futures prices are determined by the following types of market participants producers consumers speculators and governments producers have generally taken short futures positions in order to hedge against price declines consumers have generally taken long futures positions in order to hedge against price increases speculators who neither produce nor intend to consume the commodity are present in the spot and futures markets for the purpose of making a profit governments play significant roles in the markets by providing producers with various support programs and in some cases by directly intervening in the markets to affect commodity prices or adjust inventory levels the traditional approach to commodity futures pricing has been based on the theory of storage 1 as fama and french 1987 1988 show this approach to commodity pricing is particularly useful for explaining the basis movement as a function of inventory levels based on the hypothesis that the marginal convenience yield on inventory declines at a decreasing rate as

carbon subsidies taxes and optimal forest management we consider the effect of carbon credit payment schemes on forest owners land use and harvest decisions we study two possible credit allocation regimes one where credits are allocated according to the actual amount of carbon sequestered by the trees on a piece of land and another where credits are allocated according to the long run potential to sequester carbon on the land using a real options model with uncertain future timber prices we examine the effect on the timing of harvests and the replanting abandonment decision we show that both schemes discourage deforestation compensating growers for actual carbon sequestration leads to longer rotation periods between harvests while basing compensation only on the long run potential level of sequestration induces shorter rotation periods the former scheme leads to greater benefits of carbon sequestration at lower cost than the latter scheme although inducing moderate levels of sequestration is expensive under both schemes the cost falls dramatically when the level of payments climbs above some threshold indeed providing the payments are sufficiently generous carbon credit payment schemes offer an effective means of increasing carbon sequestration

detecting spot price forecasts in futures prices futures markets are often described as having two important social functions first they facilitate the transfer of commodity price risk and second they provide forecasts of commodity prices the evidence that futures markets transfer price risk is irrefutable however there is some debate about the markets forecasting ability in particular forecasts based on the current spot price are often as good as those based on the futures price some economists cite a failure to detect superior forecast power in futures prices as evidence of market inefficiency see e g leuthold 1974 and martin and garcia 1981 there are at least two other explanations first there may be nothing for the futures market to forecast if the current spot price equals the true expectation of the future spot price the futures market cannot provide a better forecast second a superior futures market forecast may be obscured by the unexpected component of the realized spot price the true expectation of the future spot price is unobservable one must approximate this expectation with the actual future spot price

agricultural land values and the value of rights to future land development we investigate the inuence of fu ture land development on current agricultural land values from a theoretical model of land markets we derive a reduced form expression for agricultural land values in terms of observable variables this result dictates the speci cation of our econometric model and we nd strong sup port for the model in an application to new york state the estimated model together with a spa tial interpolation algorithm is used to generate a surface of estimated development rights values for orange county this approach overcomes several problems that arise with the use of stan dard appraisal methods to value conservation easements jel q24

valuing managerial flexibility an application of real option theory to mining investments abstract the value of managerial flexibility is assessed using data on prices costs grades reserves ore extraction and metal output for a panel of canadian copper mines a real option model is estimated and solved for project and option values most empirical researchers i consider the initial investment decision but neglect flexible operation thereafter ii assume that price is stochastic but ignore cost and reserve uncertainty and iii model price as a nonstationary stochastic process the evolution of three state variables price cost and reserves is assessed here differences in assumptions compared to others are found to lead to large differences in estimated project and option values

soybean inventory and forward curve dynamics we present two results concerning soybean prices first we exhibit a simple relationship between stocks and price volatility the observation of an increasing price volatility with decreasing inventory is often mentioned in the literature but has so far been documented using a proxy for inventory see fama and french 1987 1988 litzenberger and rabinowitz 1995 instead we reconstruct a yearly quarterly and monthly database of worldwide soybean inventories using aggregate data from the united states brazil and argentina we show that under all time scales price volatility is an increasing linear function of inverse inventory which we term scarcity second we show how the addition of the factor scarcity in a state variable approach to the dynamics of the term structure of soybean forward prices improves the quality of the fit we document this property on a 25 year database of cbot futures contracts and show that the superior accuracy also affects long maturity futures contracts an important property for the valuation of long term origination contracts between producing countries and the agrifood industry

forest valuation under the new zealand emissions trading scheme a real options binomial tree with stochastic carbon and timber prices under the new zealand emissions trading scheme forests planted on or after january 1 1990 earn carbon credits these credits have to be repaid when the forest is harvested this paper analyses the effects of this scheme on the value of bareland on which radiata pine is to be planted a real options method is developed and applied assuming stochastic carbon and timber prices we find that land value increases by about 73 with the optimal rotation age substantially lengthened the derived optimal harvest price thresholds are useful in deciding whether to harvest or to wait jel q23 q28

the lognormal diffusion is hardly an equilibrium price process for exhaustible resources abstract in a model of a competitive spot market for an exhaustible resource under demand uncertainty it is shown that the lognormal diffusion the geometrical brownian motion can hardly be an equilibrium price process under the reasonable assumptions that suppliers choose the time to extract and deposits have different costs each supplier will start extraction when price first exceeds a boundary which depends on that supplier s costs but no new extraction will start during periods when the price is lower than the previously recorded high it is highly unlikely that aggregate demand responds to prices in the same way as supply

stoking the fires co2 emissions and economic growth abstract we examine the relationship between economic development and carbon dioxide emissions a greenhouse gas central to global warming predictions estimates derived from global panel data suggest a diminishing marginal propensity to emit mpe carbon dioxide as gdp per capita rises despite this global carbon dioxide emissions growth will continue at 1 8 percent per annum for the foreseeable future a result that is not sensitive to average output growth instead emissions growth continues because output and population will grow most rapidly in lower income nations with high mpes this latter feature emphasizes the distributional consequences of policies to reduce emissions

commodity betas with mean reverting output prices abstract this paper provides a theoretical derivation of commodity beta stock price sensitivity to commodity price using a contingent claim model the model incorporates operating leverage financial leverage costly financial distress and mean reverting commodity prices and highlights the important role played by the speed of reversion of the commodity price it is used to identify theoretically the main determinants of commodity beta commodity beta is predicted to be an increasing function of the operating and financial leverage of the firm and a decreasing function of the company s tax rate and the level volatility and speed of reversion of the commodity price empirical tests with a sample of gold mining firms provide support for these predictions particularly the new implications of the model the effect of the commodity price s speed of reversion and the company s tax rate

the decentering of the global firm this paper describes recent changes in the relationship between firms and nation states firms are typically linked to the nation in which they began and are considered to have fixed national identities while firms have reallocated various activities around the world in response to value creation opportunities they have largely retained their national identities and their headquarter activities have remained bundled in their home countries this characterisation is increasingly tenuous firms are redefining their homes by unbundling their headquarters functions and reallocating them opportunistically across nations a firm s legal home its financial home and its homes for managerial talent no longer need to be co located and consequently the idea of firms as national actors rooted in their home countries is rapidly becoming outdated the implications for policymakers and researchers are outlined

a real options model to assess the role of flexibility in forestry and agroforestry adoption and disadoption in the lower mississippi alluvial valley efforts to restore the lower mississippi alluvial valley s forests have not achieved desired levels of ecosystem services production we examined how the variability of returns and the flexibility to change or postpone decisions option value affects the economic potential of forestry and agroforestry systems to keep private land in production while still providing ecosystem services a real options analysis examined the impact of flexibility in decision making under agriculture forestry and agroforestry and demonstrated that adoption of forestry or agroforestry systems is less feasible than would be predicted by deterministic capital budgeting models

the effect of mean reversion on investment under uncertainty abstract mean reverting processes are appropriate for most real option investment models yet geometric brownian motion gbm processes are generally used for tractability hassett and metcalf j econom dyn control 19 1995 1471 1488 argue that using a gbm process is justified because mean reversion has two opposing effects it brings the investment trigger closer and also reduces the conditional volatility thereby lowering the likelihood of reaching the trigger and the overall effect on investment should be negligible for most reasonable parameter values this paper extends the hassett and metcalf model by incorporating a third factor the effect of mean reversion on systematic risk the main result is that mean reversion in general does have a significant impact on investment moreover this effect could be either positive or negative depending on various factors such as project duration cost of investing interest rate etc thus it is generally inappropriate to use the gbm process to approximate a mean reverting process

optimal inventory policies when purchase price and demand are stochastic in this paper we consider the problem of a firm that faces a stochastic poisson demand and must replenish from a market in which prices fluctuate such as a commodity market we describe the price evolution as a continuous stochastic process and we focus on commonly used processes suggested by the financial literature such as the geometric brownian motion and the ornstein uhlenbeck process it is well known that under variable purchase price a price dependent base stock policy is optimal using the single unit decomposition approach we explicitly characterize the optimal base stock level using a series of threshold prices we show that the base stock level is first increasing and then decreasing in the current purchase price we provide a procedure for calculating the thresholds which yields closed form solutions when price follows a geometric brownian motion and implicit solutions under the ornstein uhlenbeck price model in addition our numerical study shows that the optimal policy performs much better than inventory policies that ignore future price evolution because it tends to place larger orders when prices are expected to increase

trends in natural resource commodity prices deterministic or stochastic abstract the type of trend be it stochastic or deterministic exhibited by the price of a resource commodity should play a critical role in the development and empirical verification of theories which may explain its long run behavior the nature of the trend however can only be discerned through empirical testing to this end we present a menu of unit root testing procedures for characterizing observed trends in any economic time series including natural resource commodity prices we examine the prices of 11 resource commodities the evidence suggests that five price series exhibit stochastic trends while the remaining six price series appear to be stationary around a deterministic trend

the determinants of atmospheric so2 concentrations reconsidering the environmental kuznets curve this analysis explores the effects of income and the spatial intensity of economic activity on the atmospheric concentration of sulfur dioxide the results indicate that there is a u shaped relation between income and atmospheric concentration of so2 and an inverted u shaped relation between the spatial intensity of economic activity and so2 concentrations these results suggest that the spatial intensity of economic activity rather than income provides the impetus for policies and technologies that reduce so2 emissions based on this result the atmospheric concentration of so2 in developing nations may decline faster than indicated by previous analyses the potential for this decline depends on the rate at which income grows relative to population the trade off between the effects of income gains and the spatial intensity of economic activity on the atmospheric concentration of so2 is consistent with the notion that some environmental problems can be ameliorated by slowing population growth and increasing income levels

investment under alternative return assumptions comparing random walks and mean reversion abstract many recent theoretical papers have come under attack for modeling prices as geometric brownian motion this process can diverge over time implying that firms facing this price process can earn infinite profits we explore the significance of this attack and contrast investment under geometric brownian motion with investment assuming mean reversion while analytically more complex mean reversion in many cases is a more plausible assumption allowing for supply responses to increasing prices we show that cumulative investment is generally unaffected by the use of a mean reversion process rather than geometric brownian motion and provide an explanation for this result

swedish co2 emissions 1900 2010 an exploratory note abstract this paper projects swedish co 2 emissions during the period 2000 2010 based on data covering 1900 1999 swedish climate policy is currently based on the assumption that carbon emissions will increase ceteris paribus by 5 15 relative to the 1990 level this forecast has motivated a number of policy measures including carbon taxes subsidies and an information package we find however that co 2 emissions may well be lower in the future this outcome is broadly consistent with the literature on the environmental kuznets curve which portrays the relationship between emissions and gdp the key contribution of this paper is that our analysis is based on a long time series current literature is invariably based on short panel data sets while we study a single country through several phases of development our analysis also sheds some light on the key importance played by nuclear power for carbon emission projections

investigation of the environmental kuznets curve for carbon emissions in malaysia do foreign direct investment and trade matter abstract environmental degradation has become a central issue of discussion among the economists and environmentalists in view of malaysia s position as one of the main contributors to co2 emissions in asia and its status as a fast growing economy it is vital therefore to conduct a study to identify the relationship between economic growth and co2 emissions for malaysia this study attempts to examine empirically the environmental kuznets curve hypothesis for malaysia in the presence of foreign direct investment and trade openness both in the short and long run for the period 1970 to 2008 the bounds testing approach and granger causality methodology are applied to test the interrelationships of the variables the results of our study indicate that the inverted u shaped relationship does exist between economic growth and co2 emission in both the short and long run for malaysia after controlling for two additional explanatory variables namely fdi and trade importantly the results of the study also provide some crucial policy recommendations to the policy makers

wicksellian theory of forest rotation under interest rate variability abstract we apply the wicksellian single rotation framework to cover the unexplored case of variable and stochastic interest rate we provide a mathematical characterization of the two dimensional optimal stopping problem and show in the presence of amenity valuation that increased interest rate volatility lengthens the optimal rotation period and increases the value of the optimal policy by modelling the interest rate as a mean reverting process and forest value as a geometric brownian motion and abstracting from amenity valuation we present an explicit solution for the problem numerical illustrations indicate that interest rate volatility has a significant and non linear impact on optimal rotation

a test for parameter homogeneity in co2panel ekc estimations this paper casts doubt on empirical results based on panel estimations of an inverted u relationship between per capita gdp and pollution using a new dataset for oecd countries on carbon dioxide emissions for the period 1960 1997 we find that the crucial assumption of homogeneity across countries is problematic decisively rejected are model specifications that feature even weaker homogeneity assumptions than are commonly used furthermore our results challenge the existence of an overall environmental kuznets curve for carbon dioxide emissions

transboundary effects of environmental policy markets and emission leakages abstract one of many explanations for environmental kuznets curves for rich countries can be that dirty production is relocated to economies with laxer abatement regimes if this is caused by national abatement policies environmental stresses are transferred to other countries further the economic costs of national abatement policies can be shared with foreigners to some extent both through a lower demand for imports and losses of market shares for foreign competitors that produce cleaner products we quantify effects internally and abroad of a growth induced unilateral carbon tax policy in a rich open economy we find that the environmental benefits fall and the economic costs rise when a global rather than a national perspective is employed

taxation and rotation age under stochastic forest stand value abstract the paper uses both the single rotation and ongoing rotation framework to study the impact of yield tax lump sum tax and tax on interest rate earnings on the privately optimal rotation period when forest stand value is stochastic and forest owners are risk averse or risk neutral under risk aversion the optimal harvesting threshold is lower and therefore the expected rotation period shorter than under risk neutrality both in the single and ongoing rotation cases whether the forest owner is risk averse or risk neutral a higher yield tax a higher lump sum tax or a higher tax on interest rate earnings raise the optimal harvesting threshold numerical results indicate that the optimal harvesting threshold increases less rapidly under risk aversion than under risk neutrality with an increase in either a yield tax or the volatility of forest stand value

a stochastic analysis of the tree paradigm abstract the tree paradigm which is a problem in optimal stopping has important ramifications for human capital acquisition search behavior firm entry and in the theory of renewable resources our paper extends previous work in the stochastic literature on several fronts we exhibit a tractable solution to the rotation problem for the stochastic model analyze the effects of inputs which control the growth process and illustrate our results with a multi stage learning problem

the costs of carbon sequestration a revealed preference approach increased concem by policy makers with the threat of global climate change has brought with it considerable attention to the possibility of encouraging the growth of forests as a means of sequestering carbon dioxide national academy of sciences nas 1992 james p bruce et al 1996 1 the kyoto protocol to the united nations framework convention on climate change 1997 which establishes emission reduction targets for the united states and other industrialized nations states that carbon sequestration can be used by participating nations to achieve their targets moreover even before the kyoto agreement this approach had become an explicit element of both u s and intemational climate policies u s department of energy 1991 united nations general assembly 1992 william j clinton and albert gore 1993 this high level of interest has been due in part to suggestions that sufficient lands are available to use the approach to mitigate a substantial share of annual carbon dioxide c02 emissions greg marland 1988 daniel a lashof and dennis a tirpak 1989 mark c trexler 1991 and claims that growing trees to sequester carbon is a relatively inexpensive means of combating climate change roger a sedjo and allen m solomon 1989 daniel j dudek and alice leblanc 1990 nas 1992 in other words the serious attention given by policy makers to carbon sequestration can partly be explained by implicit assertions about respective marginal cost functions i develop and demonstrate a method by which the costs of carbon sequestration can be estimated on the basis of evidence from landowners behavior when confronted with the opportunity costs of alternative land uses the simplest of previous economic analyses derived single point estimates of average costs associated with particular sequestration levels marland 1988 sedjo and solomon 1989 dudek and leblanc 1990 edwin s rubin et al 1992 omar masera et al 1995 often it has been assumed that land opportunity costs are zero g van kooten et al 1992 j k winjum et al 1992 new york state energy office 1993 robert k dixon et al 1994 another set of studies essentially engineering costing models has constructed marginal cost schedules by using information on revenues and costs of production for altemative uses on representative types or locations of land and then sorting these in ascending order of cost robert j moulton and kenneth r richards 1990 richards et al 1993 simulation models include a model of the lost profits due to removing land from agricultural production peter j parks and ian w hardie 1995 a mathematical programming model of the agricultural sector and the timber market richard m adams et al 1993 a related model incorporating the effects of agricultural price support programs j m callaway and bruce mccarl 1996 and a dynamic simulation model of forestry susan swinehart 1996 lastly an analysis by andrew j plantinga 1995 adopts land use elasticities from an econometric study to estimate sequestration costs we draw on some of the best features of the previous studies including the carbon levelization method of moulton and richards john f kennedy school of government harvard university 79 john f kennedy street cambridge ma 02138 and resources for the future richard newell supplied excellent research assistance and valuable comments on a previous version were provided by lawrence goulder william nordhaus andrew plantinga kenneth richards two anonymous referees participants in seminars at the universities of california at los angeles and santa barbara the university of maryland the university of michigan the university of texas harvard university stanford university yale university resources for the future and the national bureau of economic research the author alone is resdonsible for any errors 1 after fossil fuel combustion deforestation is the second largest source of carbon dioxide emissions estimates of annual global emissions from deforestation range from 0 6 to 2 8 billion tons compared with slightly less than 6 0 billion tons annually from fossil fuel combustion cement manufacturing and natural gas flaring combined r a houghton 1991 t m smith et al 1993

a markup interpretation of optimal investment rules we re examine the basic investment problem of deciding when to incur a sunk cost to obtain a stochastically fluctuating benefit the optimal investment rule satisfies a trade off between a larger versus a later net benefit we show that this trade off is closely analogous to the standard trade off for the pricing decision of a firm that faces a downward sloping demand curve we reinterpret the optimal investment rule as a markup formula involving an elasticity that has exactly the same form as the formula for a firm s optimal markup of price over marginal cost this is illustrated with several examples consider what is probably the most basic irreversible investment problem a project can be undertaken that requires a sunk cost c and yields a benefit v the cost is known and constant over time but the benefit measured as the present value at the time the cost is incurred fluctuates as an autonomous markov process vt with continuous sample paths time is continuous and

regime switching in stochastic models of commodity prices an application to an optimal tree harvesting problem abstract this paper investigates whether a regime switching model of stochastic lumber prices is better for the analysis of optimal harvesting problems in forestry than a more traditional single regime model prices of lumber derivatives are used to calibrate a regime switching model with each of two regimes characterized by a different mean reverting process a single regime mean reverting process is also calibrated the value of a representative stand of trees and optimal harvesting prices are determined by specifying a hamilton jacobi bellman variational inequality which is solved for both pricing models using a implicit finite difference approach the regime switching model is found to more closely match the behavior of futures prices than the single regime model in addition analysis of a tree harvesting problem indicates significant differences in terms of land value and optimal harvest thresholds between the regime switching and single regime models

are there limits to growth a simple theoretical model of pollution is developed that generates an inverted u shape relationship between per capita income and environmental quality this model is then used to study long run growth the same inverted u shape is shown to appear in time series and the prospects for sustained growth are shown to hinge on whether increasingly strict environmental regulation is compatible with a constant rate of return on capital implementation is also studied tax and voucher schemes are shown to have an advantage over direct regulation because they provide the correct incentives for capital accumulation copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

conservation payments under uncertainty the decision of whether to retain forest or convert to another land use is affected by uncertainty over future land use returns this paper examines the design of conservation payments to landowners under uncertainty payments are either indexed to the returns from deforestation agriculture or to a market value associated with forest nonuse benefits payment size depends on the degree of correlation between payments and agricultural returns and their relative volatility market based payments for reducing emissions from deforestation and degradation redd are simulated for brazilian soybean growers payments indexed to carbon prices are larger than those indexed to international soybean prices

the planting real option in cash rent valuation after entering into a farmland cash rent contract in the fall a tenant farmer has flexibility over the spring crop choice and the input application level failure to account for these options will bias estimates of what farmers should pay to rent land applying monte carlo simulation methods this study investigates the option values for these choices a multivariate gaussian copula mgc is employed to account for dependence among yields and prices results show that the average cash rent valuation for the real option approach is 33 6 higher than that for the conventional net present value npv method in which the input intensity option is 0 9 crop planting sequence is shown to impact the real option value

exploring the role delaware plays as a domestic tax haven abstract we examine whether delaware is a domestic tax haven we find that taxes play an economically important role in determining whether u s firms locate subsidiaries in delaware and that a delaware based state tax avoidance strategy lowers state effective tax rates by between 0 7 and 1 1 percentage points on average the tax savings represent a 15 24 decrease in the state income tax burden and translate to an increase in net income of 1 04 1 47 however we find that the tax benefits of delaware tax strategies are diminishing over time in response to initiatives by state governments to limit multistate tax avoidance

investment flexibility as a barrier to entry abstract this paper presents a model of investment in a duopoly with firms that choose the scale and timing of investment decision making flexibility and the costs saved by investing in large steps rather than sequences of small steps determine an incumbent s ability to deter entry by a potential competitor entry occurs when these cost savings are very small or very large because the effect of increased industry capacity on the incumbent s assets in place is the same regardless of which firm invests in intermediate cases the incumbent is able to deter entry by making a smaller earlier investment than the potential entrant the smaller investment scale protects the incumbent s assets in place which offsets the incumbent s cost disadvantage from investing in smaller steps than the entrant would choose nevertheless the threat of entry constrains the incumbent s investment behavior and limits its profitability the model is solved using a combination of best response iteration and the projected successive over relaxation method

the valuation of forestry resources under stochastic prices and inventories a contingent claims approach to capital budgeting may be preferable to traditional methods where uncertainty and managers strategic reactions to changing conditions are impor tant as an example of such a case we solve the classical problem of the duration of an investment in forestry resources i e when to cut down the trees in the general case of stochastic output prices and stochastic natural growth rate and timber inventories a con tingent claims approach is used to value the forestry resources as a function of 1 sto chastic prices and inventories and 2 an asymmetric optimal production policy that incorporates the option to halt timber production temporarily i introduction classical capital budgeting techniques are based on the assumption that fu ture cash flows follow a rigid pattern and can be accurately predicted far into the future on the basis of such cash flow predictions the project is either accepted or rejected the uncertainty in the project and management s strategic reactions to changing conditions are dealt with only superficially at best a risk adjusted interest rate is employed and various deterministic scenarios are plotted out in situations where uncertainty and management s strategic reactions to it are im portant the classical technique is apt to lead to wrong decisions the technology needed to deal with such problems more accurately is becoming available the purpose of this paper is to present a stylized example of how it can be used our example is a general solution to the classical duration problem of the optimal control of a long term renewable resource investment such as forestry resources i e when to chop down a tree 1 if the prices and the natural growth rate of the inventory of forest timber are assumed to be deterministic the optimal control is very simple to derive but when both the price and inventory of timber are stochastic the problem becomes both stochastic and asymmetric the asym

information access income distribution and the environmental kuznets curve abstract recent empirical studies have tested the hypothesis of an environmental kuznets curve ekc focusing primarily on the relationship between per capita income and certain types of pollutant emissions given the stock nature of many pollution problems emissions only partially account for the environmental impacts moreover almost all of the studies have given consideration to little more than income levels as explanatory variables this paper empirically tests the hypothesis of the ekc existence for a stock sensitive indicator that is the percentage of protected area pa within national territory it does theorize that economic growth is a necessary condition in order to better address environmental issues but it also stresses that other variables income distribution education information accessibility may play a fundamental role in determining environmental quality contrary to other studies that mainly focus on the calculation of the income level corresponding to the transition point this paper is more concerned with the calculation of environmental quality corresponding to that transition point that is the minimum level of environmental quality that a country is willing to accept this paper highlights the idea that if the transition point is determined primarily by income level social policies determine the level of environmental quality corresponding to that point

the spillover effects of biofuel policy on participation in the conservation reserve program abstract this paper studies the spillover effects of rising biofuel production on participation in the conservation reserve program landowner participation decisions are modeled using a real options framework we develop a land use decision model that captures biofuel driven structural changes in market demand and derive threshold conditions that trigger participation in the program we then quantify the impacts of biofuel production on participation at both the national and state levels using monte carlo simulations the model is also used to analyze how changes in the persistence of the biofuel production boom and in the volatility of farming returns affect conservation participation decisions policy implications of the results are discussed

resource extraction with a carbon tax and regime switching prices exercising your options this paper develops a model of a profit maximizing firm with the option to exploit a non renewable resource choosing the timing and pace of development the resource price is modelled as a regime switching process which is calibrated to oil futures prices a hamilton jacobi bellman equation is specified that describes the profit maximization decision of the firm the model is applied to a problem of optimal investment in a typical oils sands in situ operation and solved for critical levels of oil prices that would motivate a firm to make the large scale investment needed for oil sands extraction as well as to operate mothball or abandon the facility regime shifts can have an important effect on the optimal timing of investment and extraction the paper examines the effect of several carbon tax schemes on optimal timing of construction production and abandonment a form of green paradox is identified

informational efficiency of markets for stumpage comment in a study of the information efficiency of markets for stumpage in the southern united states washburn and binkley found that time series data on stumpage price if given on annual or quarterly bases reveal weak form information efficiency for stumpage markets from this they conclude that there can be no gain from using past price movements to play the market in timing timber harvests p 403 specifically they infer that the reservation price rules derived for optimal forest harvesting by norstrom lohmander and brazee and mendelsohn are not applicable to the management of southern pine timberlands

economic growth inequality democratization and the environment we augment the stokey 1998 model by allowing agents to differ with respect to environ mental quality and income in order to analyze the impact of income and environmental inequality and of democratization on aggregate pollution we find that the impact of a more equal income distribution depends on the degree of democracy in a complete democracy a more equal income distribution generates ceteris paribus less pollution which is consistent with indirect empirical evidence whereas the opposite is the case if democratic rights are highly restricted furthermore a democratization is argued to typically lower both the income and the environmental quality of the median voter in this case if in utility terms the fall in environmental quality is worse than the fall in consumption the median voter decides to tighten environmental legislation so that aggregate pollution decreases

production and spatial distribution of switchgrass and miscanthus in the united states under uncertainty and sunk cost abstract the u s cellulosic biofuel mandate has not been enforced in recent years uncertainty surrounding the enforcement of the mandate in addition to high production and harvest cost have contributed to a delay in the widespread planting of bioenergy crops such as switchgrass and miscanthus previous literature has shown that under uncertainty and sunk cost an investment threshold is further increased due to the value associated from holding the investment option in this paper we extend the previous literature by applying a real option switching model to bioenergy crop production first we calculate the county level break even price which triggers a switching away from traditional field crops corn soybeans and wheat to bioenergy crops under various scenarios differing by commodity prices production cost and biomass price expectations we show that the resulting break even prices at the county level can be substantially higher than previously estimated due to the inclusion of the option value in a second step we identify counties that are most likely to grow switchgrass or miscanthus by simulating a stochastic biomass price over time our results highlight two issues first switchgrass or miscanthus are not grown in the midwest under any scenario under low agricultural residue removal rates biomass crops are mostly grown in the southeast second under the assumption of a high removal rates bioenergy crops are not grown anywhere in the u s since the cellulosic biofuel mandate can be covered by agricultural residues

modeling the nexus between carbon dioxide emissions and economic growth the effects of economic growth on the environment have received increased attention as global warming and other environmental problems become more serious many empirical studies explain the nexus between carbon dioxide emissions and economic growth with such models as the environmental kuznets curve ekc theory however the assumptions of these models have never received strict verification with a large available data set and therefore may not be appropriate to describe the relationship in this study the nexus is modeled for 67 countries from 1971 to 2010 using a novel symbolic regression method from the experimental results several conclusions as follows could be reached firstly there is no universal model fitting every country and symbolic regression could discover a set of reasonable models for a specific country or region secondly four models including the inverted n shaped m shaped inverted u shaped and monotonically increasing are frequently found without domain experts intervention in these countries whereas the m shaped model has received little attention in previous studies but exhibits promising performance thirdly the relationship is diversified due to the difference of regions and economic development where developed countries generally follow the inverted n shaped and m shaped models to explain the relationship whereas developing countries are more likely to refer to the inverted n shaped inverted u shaped and monotonically increasing models finally several policy suggestions are presented

searching for a kuznets curve in environmental efficiency using kernel estimation abstract the paper constructs environmental efficiency indexes for a sample consisting of high and low income countries using nonparametric production frontier techniques and then establishes an environmental kuznets relationship for environmental efficiency by nadaraya watson kernel estimation methodology

switching to perennial energy crops under uncertainty and costly reversibility we study a farmer s decision to convert traditional cropland into land for growing dedicated energy crops taking into account sunk conversion costs and uncertainties in crop returns the optimal decision rules differ significantly from the expected net present value rule which ignores uncertainties and from real options models that allow only one way conversion into energy crops these models also predict drastically different patterns of land conversions into and out of energy crops over time using corn soybean rotation and switchgrass as examples we show that the model predictions are sensitive to assumptions about stochastic processes of the returns government policies might have unintended consequences subsidizing conversion costs into switchgrass may not much affect proportions of land in switchgrass in the long run

cointegration and detectable linear and nonlinear causality analysis using the london metal exchange lead contract this study applies linear and nonlinear granger causality tests to examine the dynamic relation between london metal exchange lme cash prices and three possible predictors the analysis uses matched quarterly inventory uk treasury bill interest rates futures prices and cash prices for the commodity lead traded on the lme the effects of cointegration on both linear and nonlinear granger causality tests is also examined when cointegration is not modelled evidence is found of both linear and nonlinear causality between cash prices and analysed predictor variables however after controlling for cointegration evidence of significant nonlinear causality is no longer found these results contribute to the empirical literature on commodity price forecasting by highlighting the relationship between cointegration and detectable linear and nonlinear causality the importance of interest rate and inventory as well as futures price in forecasting cash prices is also illustrated failure to detect significant

harvest decisions and asset valuation for biological resources exhibiting size dependent stochastic growth optimal harvest rules and preharvest valuation procedures are derived for biological assets with stochastic size dependent growth in a stochastic price environment these issues are analyzed as continuous time optimal stopping problems both the single rotation and ongoing rotations problems are addressed the sensitivity of harvest and valuation rules is assessed the results are compared with those derived from a myopic look ahead procedure and with the corresponding findings for age dependent growth copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

richer and cleaner a study on carbon dioxide emissions in developing countries abstract the climate change debate has drawn attention to the problem of greenhouse gases emissions into the atmosphere one of the most important issues in the policy debate is the role that should be played by developing countries in joining the commitment of developed countries to reduce ghg emissions and particularly co2 emissions this debate calls into play the relationship between energy consumption co2 emissions and economic development in this paper we use a panel data model for 110 world countries to estimate the relationship between co2 emissions and gdp and to produce emission forecast the paper contains three major results i the empirical relationship between carbon dioxide and income is well described by non linear gamma and weibull specifications as opposed to more usual linear and log linear functional forms ii our single equation reduced form model is comparable in terms of forecasted emissions with other more complex less data driven models iii despite the decreasing marginal propensity to pollute our forecasts show that future global emissions will rise the average world growth of co2 emissions between 2000 and 2020 is about 2 2 yr while that of non annex 1 countries is posted at 3 3 yr

what a difference a stochastic process makes epidemiological based real options models of optimal treatment of disease the real options approach has been used within environmental economics to investigate the impact of uncertainty on the optimal timing of control measures to minimise the impacts of invasive species including pests and diseases previous studies typically model the growth in infected area using geometric brownian motion gbm the advantage of this simple approach is that it allows for closed form solutions however such a process does not capture the mechanisms underlying the spread of infection in particular the gbm assumption does not respect the natural upper boundary of the system which is determined by the maximum size of the host species nor the deceleration in the rate of infection as this boundary is approached we show how the stochastic process describing the growth in infected area can be derived from the characteristics of the spread of infection if the model used does not appropriately capture uncertainty in infection dynamics then the excessive delay before treatment implies that the full value of the option to treat is not realised indeed when uncertainty is high or the disease is fast spreading ignoring the mechanisms of infection spread can lead to control never being deployed thus the results presented here have important implications for the way in which the real options approach is applied to determine optimal timing of disease control given uncertainty in future disease progression

rural land use traditional agriculture or forestry the signing of the kyoto protocol and the official recognition of forestry s capacity to sequester carbon has prompted considerable interest within the european union in forestry as a competing land use application however despite large increases in grants to forestry afforestation rates in certain eu countries are below national targets in this paper we employ a real options model to theoretically explain why farmers may be slow to switch land from traditional agriculture to forestry the theoretical model is then used to motivate an empirical dynamic panel data model and both models are applied to irish data

optimal forest rotation when stumpage prices follow a diffusion process 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

commodity derivatives pricing with cointegration and stochastic covariances abstract empirically cointegration and stochastic covariances including stochastic volatilities are statistically significant for commodity prices and energy products to capture such market phenomena we develop a continuous time dynamics of cointegrated assets with a stochastic covariance matrix and derive the joint characteristic function of asset returns in closed form the proposed model offers an endogenous explanation for the stochastic mean reverting convenience yield the time series of spot and futures prices of wti crude oil and gasoline shows cointegration relationship under both physical and risk neutral measures the proposed model also allows us to fit the observed term structure of futures prices and calibrate the market implied cointegration relationship we apply it to value options on a single commodity and on multiple commodities

mean reversion in equilibrium asset prices evidence from the futures term structure we use the term structure of futures prices to test whether investors anticipate mean reversion in spot asset prices the empirical results indicate mean reversion in each market we examine for agricultural commodities and crude oil the magnitude of the estimated mean reversion is large for example point estimates indicate that 44 percent of a typical spot oil price shock is expected to be reversed over the subsequent eight months for metals the degree of mean reversion is substantially less but still statistically significant we detect only weak evidence of mean reversion in financial asset prices in this study we provide evidence of mean reversion in the prices of several real and financial assets rather than examining evidence of ex post reversion using time series of asset prices we use price data from futures contracts with varying delivery horizons to test whether investors expect asset prices to revert this approach offers two advantages first since futures prices are readily available for many markets our procedure can be implemented for many assets including those for which reliable spot price data is elusive second there is little ambiguity as to the source of any mean reversion detected using our method subject only to the maintained assumption that the no arbitrage cost of carry condition holds our test detects mean reversion that is expected to occur in equilibrium but has no power to detect mean reversion resulting from noise or inefficiencies our methodology focuses on relations between price levels and the slope of the futures term structure defined as the change across delivery dates in the futures prices observed on a given trading date an inverse relation between prices and the futures term slope constitutes evidence that investors expect mean reversion in spot prices to illustrate initially assume there are no

the fundamentals of land prices and urban growth abstract in a very simple model in which capital is durable and landowners have perfect foresight the price of urban land has four additive components the value of agricultural land rent the cost of conversion the value of accessibility and the value of expected future rent increases a growth premium in rapidly growing cities the growth premium may easily account for half of the average price of land and may create a large gap between the price of land at the boundary minus conversion cost and the value of agricultural land rent

income inequality and pollution a reassessment of the environmental kuznets curve abstract improvements in some measures of air and water quality can accompany rising per capita income as illustrated by the so called environmental kuznets curve for pollution variables which show such a relationship we hypothesize that a more equitable distribution of power contributes to these outcomes by enhancing the influence on policy of those who bear the costs of pollution relative to the influence of those who benefit from pollution generating activities an empirical analysis of international variations in seven indicators of air and water quality supports this hypothesis literacy political rights and civil liberties are found to have particularly strong effects on environmental quality in low income countries

carbon intensity in production and the effects of climate policy evidence from swedish industry we analyze carbon intensity performance at firm level and the effectiveness of the swedish co2 tax carbon intensity performance is derived from a production technology and measured as changes in t

quantifying the value of investing in distributed natural gas and renewable electricity systems as complements applications of discounted cash flow and real options analysis with stochastic inputs abstract one energy policy objective in the united states is to promote the adoption of technologies that provide consumers with stable secure and clean energy recent work provides anecdotal evidence of natural gas ng and renewable electricity re synergies in the power sector however few studies quantify the value of investing in ng and re systems together as complements this paper uses discounted cash flow analysis and real options analysis to value hybrid ng re systems in distributed applications focusing on residential and commercial projects assumed to be located in the states of new york and texas technology performance and operational risk profiles are modeled at the hourly level to capture variable re output and ng prices are modeled stochastically as geometric ornstein uhlenbeck ou stochastic processes to capture ng price uncertainty the findings consistently suggest that ng re hybrid distributed systems are more favorable investments in the applications studied relative to their single technology alternatives when incentives for renewables are available in some cases ng only systems are the favorable investments understanding the value of investing in ng re hybrid systems provides insights into one avenue towards reducing greenhouse gas emissions given the important role of ng and re in the power sector

the role of headquarters subsidiary geographic distance in strategic decisions by spatially disaggregated headquarters various studies have explored how headquarters hq subsidiary geographic distance affects hq decisions about subsidiaries arguing that such distance causes some strategic options to be selected over others to limit ex post communication costs these studies have implicitly assumed that a multinational s hq is spatially concentrated even though multinationals have increasingly disaggregated their hq internationally we examine how such hq disaggregation changes the role that hq subsidiary geographic distance plays in hq decisions about subsidiaries we argue that hq disaggregation yields multiple hq subsidiary geographic distances all of which are a likely source of ex post communication costs and hence are likely to co determine hq decisions about subsidiaries we discuss several approaches for dealing with these multiple distances and recommend that the first best approach be adopted by future studies to avoid the biased geographic distance effects possibly present in prior studies

harvesting and recovery decisions under uncertainty abstract a stochastic forest rotation model in the faustmann tradition is presented and exemplified the model combines harvesting decisions with the potential to recover or clean up to restore the land after very unfavorable evolutions of the stochastic growth process uncertainty is shown to have a generally ambiguous effect on the optimal choice of investment strategy it is also shown how such models can be related to theory of optimal inventory control

analytical pricing of discretely monitored asian style options theory and application to commodity markets we compute an analytical expression for the moment generating function of the joint random vector consisting of a spot price and its discretely monitored average for a large class of square root price dynamics this result combined with the fourier transform pricing method proposed by carr and madan carr p madan d 1999 option valuation using the fast fourier transform journal of computational finance 2 4 summer 61 73 allows us to derive a closed form formula for the fair value of discretely monitored asian style options our analysis encompasses the case of commodity price dynamics displaying mean reversion and jointly fitting a quoted futures curve and the seasonal structure of spot price volatility four tests are conducted to assess the relative performance of the pricing procedure stemming from our formulae empirical results based on natural gas data from nymex and corn data from cbot show a remarkable improvement over the main alternative techniques developed for pricing asian style options within the market standard framework of geometric brownian motion

the dynamic behavior of efficient timber prices a simple theoreticalmodel of a tim consist ing of faustmann rotations evalubermarket finds that there exists a rational expecta ated at the mean of the price process tions equilibrium in which prices evolve according the central question addressed in this to a stationary a r 1 process simulations analyz e study is what is the appropriate model of a model with a more general representation of tim timber prices this is an important quesber stock dynamics implications for the optimal tion given the prescriptive nature of the harvesting literature are 1 market efficiency pro timber harvesting literature3 vides little justification for random walk prices 2 and evidence unit root tests used in previous studies to analyz e that the form of the price process strongly the informational efficiency of timber markets do influences the performance of a reservanot distinguish between efficient and inefficient tion price rule relative to the faustmann markets and 3 failure to recognize asymmetric rotation haight and holmes 1991 plandisturbances in time series analyses of historical tinga 1998 nonetheless most authors aptimber prices can lead to sub optimal harvesting pear to select the form of the price process rules

the stochastic rotation problem a generalization of faustmann s formula to stochastic forest growth abstract in the present paper we study the optimal cutting strategy 1 2 for an ongoing forest by using stochastic impulse control we show how faustmann s formula can be generalized to stochastic growing forests the paper extends and clarifies previous studies by miller and voltaire 1983 clarke and reed 1989 and reed and clarke 1990

crises and emissions new empirical evidence from a large sample abstract in this paper we empirically assess by means of the local projection method the impact of different types of financial crises on a variety of pollutant emissions categories for a sample of 86 countries between 1980 and 2012 we find that financial crises in general lead to a fall in co2 and methane emissions when hit by a debt crisis a country experiences a rise in emissions stemming from either energy related activities or industrial processes during periods of slack financial crises in general had a positive impact on both methane and nitrous oxide emissions if a financial crisis hit an economy when it was engaging in contractionary fiscal policies this led to a negative response of co2 and production based emissions

on solving the multirotational timber harvesting problem with stochastic prices a linear complementarity formulation this article develops a two factor real options model of the harvesting decision over infinite rotations assuming a known stochastic price process and using a rigorous hamilton jacobi bellman methodology the harvesting problem is formulated as a linear complementarity problem that is solved numerically using a fully implicit finite difference method this approach is contrasted with the markov decision process models commonly used in the literature the model is used to estimate the value of a representative stand in ontario s boreal forest both when there is complete flexibility regarding harvesting time and when regulations dictate the harvesting date

unintended impacts of public investments on private decisions the depletion of forested wetlands by affecting relative economic returns infrastructure investments can induce major changes in private land use the authors find that 30 percent of forested wetland depletion in the mississippi valley has resulted from private decisions induced by federal flood control projects despite explicit federal policy to preserve wetlands the model aggregates individual land use decisions using a parametric distribution of unobserved land quality dynamic simulations are used to quantify the impacts on wetlands of federal projects and other factors copyright 1990 by american economic association

the impact of spatial price differences on oil sands investments abstract in this article a two factor real options model is developed to examine the impact spatial price differences have on the value of an oil sands project and the incentive to invest large volatile price differences between locations can emerge when demand to ship exceeds capacity limits this may have a significant impact on production investment and policy in exporting regions here we assume the price difference between two locations follows a stationary process implying crude oil markets are integrated as oil prices in different locations move together the investment decision is formulated as a linear complementarity problem that is solved numerically using a fully implicit finite difference method results show the value of an oil sands project and the incentive to invest in a new project will increase when the mean price difference decreases surprisingly the standard deviation of the price difference has very little impact on project value or the incentive to invest