The Effect of Catastrophic Risk on Forest Investment Decisions

Abstract We analyze the effect of catastrophic risk on forest investment decisions by employing a forest-level model where the output price is specified to follow a stochastic process. We then incorporate a Poisson jump process to reflect the occurrence of catastrophic events. It is found that the presence of catastrophic risk always results in a reduced production value but an increased investment threshold for a forestry project. However, depending on the assumption regarding the option—whether the right to invest can be maintained after the occurrence of such an event—the degree and pattern of the effect are different.