Financial analysis of timberland investment in the United States
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Timberland assets, due to their unique return drivers, have attracted much attention in the past decades. In the United States, timberland assets can be both privately and publicly owned. The first part of the dissertation aims to price the timberland investments in the United States using the arbitrage pricing theory (APT). Results show that public-equity timberland assets have higher mean excess returns in general. Compared with the capital asset pricing model (CAPM), a larger portion of the variations in timberland returns are explained by the arbitrage pricing theory because more causal factors are considered. Moreover, the expected returns of timberland assets are declining over time. This may imply an improved efficiency of the timberland market. The second part assesses the risk-return relationship between forestry-related assets and innovations in state variables using the intertemporal capital asset pricing model (ICAPM). Results show that the ICAPM that includes the market excess returns and innovations in the SMB and HML factors, interest rate, term spread, default spread and aggregate consumption as risk factors explains about 80% of the variation in cross-sectional returns of 16 forestry-related assets. In addition, beta loadings on innovations in HML, interest rate and term spread induce significant risk premiums. In general, average excess returns of the forestry-related assets decrease from period of 1988Q1-1999Q4 to period of 2000Q1-2011Q4. Significant positive excess returns are obtained for private- and public-equity timberland assets in the first sub-period but the second. Insignificant excess returns are obtained for forest products and timber products in the whole period. The last part examines the relationship between investor sentiment and timberland investment returns. Results show that current investor sentiment is an important factor that determines the one-quarter future returns of timberland investment. The predicting power is persistent over the next 1-5 years. Both the short- and long-term studies obtain negative coefficients on investor sentiment. In addition, significantly different return variances and insignificantly different average returns of timberland investment are obtained between low- and high-sentiment periods. This further confirms the ability of earning long-term stable returns by timberland investment.