Pricing timberland assets in the United States by the arbitrage pricing theory

Abstract

Using quarterly data (1988Q1–2011Q4), we assess the financial performance of timberland investments in the United States by the arbitrage pricing theory. Private-equity timberland returns are approximated by various indices reported by the National Council of Real Estate Investment Fiduciaries and public-equity timberland returns are approximated by a dynamic portfolio of publicly traded timber firms. The results show that public-equity timberland assets have higher mean excess returns in general. Compared with the capital asset pricing model, a larger portion of the variations in timberland returns is explained by the arbitrage pricing theory because more causal factors are considered. To evaluate the performances of timberland assets over time, two subperiods, 1988Q1–1999Q4 and 2000Q1–2011Q4, are studied separately. The results indicate that the expected returns of timberland assets are declining over time. This may imply improved efficiency of the timberland market.