Scandinavian Working Papers in Business Administration

Working Papers,
Örebro University, School of Business

No 2016:2: Hedging with Trees: Tail-Hedge Discounting of Long-Term Forestry Returns

Lars Hultkrantz () and Panagiotis Mantalos ()
Additional contact information
Lars Hultkrantz: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden
Panagiotis Mantalos: 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.

Keywords: discounting; far distant future; declining discount rates; forestry; forest economics; cost-benefit analysis

JEL-codes: D61; D63; D81; D92; Q23

23 pages, August 17, 2016

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