Real options in the forest: what if prices are mean-reverting?

When solving the Faustmann problem in a stochastic setting, it is typically assumed that prices follow a random walk process. In the present paper, we instead assume that timber prices are mean-reverting. We take a real-option approach to the cutting problem and discuss what consequences mean-reverting prices will have compared to the traditional random-walk assumption. One conclusion is that what traditionally has been seen as irrational pricing with discount rates that are too low, may represent rational pricing of relatively low-risk, long-term investments.