Description
Abstract: Analysis of an extended price series from 1973 to 2016 for New Zealand A grade export logs confirms that the price series is not I(0) stationary. The rejection of the unit root test suggests that it is also not I(1). It is estimated that log prices are fractionally integrated with A grade prices being I(0.78) and the natural logarithm of A grade prices being I(0.83). The implication is that log prices should be modelled using fraction Brownian motion (FBM) rather than geometric Brownian motion (GBM) or as a stationary autoregressive process. The difference in the NPV calculated using FBM compared to the NPV of classic Faustmann or GBM depends on the fractional difference, log price and volatility. Analysis of the extended A grade price series indicates an H value of about 0.3. At this level the differences at stand age 0, from both Faustmann and GBM, are modest in terms of NPV. However the differences are marked in terms of reserve log price strategy, probability of harvest and rotation age. Differences in NPV between FBM and Faustmann increase and become material as volatility increases.