Market model with long-term effects - Empirical evidence from Finnish forestry returns

The aim of the study is to reformulate the conventional market model by con sidering also long-run characteristics of forestry returns. Finnish stumpag e prices and the stock market index are found co-integrated. Co-integration relationship between timber and stock market indicates that there are fact ors in timber market like high transaction costs, illiquidity or temporal l ack of information, and in the Finnish case, price recommendations that are priced by marker. The presence of long-run effects may make the short-term market model mis-specified and it may,give misleading and incomplete resul ts concerning the expected risk and return of forestry. In our case, the ma rket model risk beta was only slightly biased. This study indicates that an error-correction model is more appropriate model than the market model.