Empirical analysis of the economic effect of tree species diversity based on the results of a forest accountancy data network

Abstract

The selection of tree species for the establishment of forest stands can be regarded as a financial investment with long-lasting economic consequence. This study applies empirical forest enterprise accounting data to investigate the theoretical concept of the diversification effect and its practical implications for forest tree species diversity. Based on the data of a forest accountancy data network in Germany, the effect of tree species diversity on risk and return was analyzed. The data revolves around the most relevant tree species groups in Germany including Norway spruce (Picea abies L. Karst), European beech (Fagus sylvatica L.), oak (Quercus spec.) and Scots pine (Pinus sylvestris L.). The data demonstrated a positive diversification effect as tree species diversity in forest enterprises was negatively correlated with the volatility of return. The observed volatility of return in forest enterprises was lower than the weighted return volatility of their underlying tree species. Analysis of the individual returns and volatilities revealed that the spruce generated the highest economic return and highest absolute volatility followed by the hardwood species and the pine. Furthermore, we showed that the premises behind the theory of the diversification effect are not always consistent with empirical data, particularly in regard to the stationarity assumption of times series.In summary, our empirical data supports the theory in that forest enterprises with a diversified tree species composition will not yield the highest returns possible, but are able to minimize risk for a given level of return. However, the non-stationary development of tree-species-assets as well as risk preferences need to be considered in management decisions.