Risk Aversion and Optimal Rotation: a Stochastic Efficiency Approach

Abstract

A new stochastic efficiency analysis approach, called stochastic efficiency with respect to a function (SERF), that partitions a set of risky alternatives in terms of certainty equivalents (CEs) for a specified range of attitudes to risk, is applied to analyse average optimal rotation strategies at different levels of forest owner's risk aversion. Using Norwegian forest data with stochastic timber price and volume growth, the empirical results show that the optimal rotation length increases with increasing degree of risk aversion. It is also found that the effect of risk aversion is lower with higher interest rates, while the size of the investment cost affects only the level of the CE, with the forest owner's risk aversion being relatively unimportant.