Pricing Link by Time

The combination of loss-based TCP and drop-tail routers often results in full buffers, creating large queueing delays. The challenge with parameter tuning and the drastic consequence of improper tuning have discouraged network administrators from enabling AQM even when routers support it. To address this problem, we propose a novel design principle for AQM, called the pricing-link-by-time (PLT) principle. PLT increases the link price as the backlog stays above a threshold β, and resets the price once the backlog goes below β. We prove that such a system exhibits cyclic behavior that is robust against changes in network environment and protocol parameters. While β approximately controls the level of backlog, the backlog dynamics are invariant for β across a wide range of values. Therefore, β can be chosen to reduce delay without undermining system performance. We validate these analytical results using packet-level simulation

The Price Isn't Right: The Need for Reform in Consumer Electricity Pricing

Electricity prices should fully link the consumer price to peak-period generation costs, environmental costs and the high cost of new generation, according to an expert analysis released today by the C.D. Howe Institute. The author says such pricing reform is required to reduce both financial and electrical stress on the system and help prepare Ontario – and other provinces – for the rising costs of new generation.Economic Growth and Innovation, electricity pricing, Province of Ontario, conservation, environmental cost, real-time pricing

Pricing average price advertising options when underlying spot market prices are discontinuous

Advertising options have been recently studied as a special type of guaranteed contracts in online advertising, which are an alternative sales mechanism to real-time auctions. An advertising option is a contract which gives its buyer a right but not obligation to enter into transactions to purchase page views or link clicks at one or multiple pre-specified prices in a specific future period. Different from typical guaranteed contracts, the option buyer pays a lower upfront fee but can have greater flexibility and more control of advertising. Many studies on advertising options so far have been restricted to the situations where the option payoff is determined by the underlying spot market price at a specific time point and the price evolution over time is assumed to be continuous. The former leads to a biased calculation of option payoff and the latter is invalid empirically for many online advertising slots. This paper addresses these two limitations by proposing a new advertising option pricing framework. First, the option payoff is calculated based on an average price over a specific future period. Therefore, the option becomes path-dependent. The average price is measured by the power mean, which contains several existing option payoff functions as its special cases. Second, jump-diffusion stochastic models are used to describe the movement of the underlying spot market price, which incorporate several important statistical properties including jumps and spikes, non-normality, and absence of autocorrelations. A general option pricing algorithm is obtained based on Monte Carlo simulation. In addition, an explicit pricing formula is derived for the case when the option payoff is based on the geometric mean. This pricing formula is also a generalized version of several other option pricing models discussed in related studies.Comment: IEEE Transactions on Knowledge and Data Engineering, 201

Discrete-Time Interest Rate Modelling

This paper presents an axiomatic scheme for interest rate models in discrete time. We take a pricing kernel approach, which builds in the arbitrage-free property and provides a link to equilibrium economics. We require that the pricing kernel be consistent with a pair of axioms, one giving the inter-temporal relations for dividend-paying assets, and the other ensuring the existence of a money-market asset. We show that the existence of a positive-return asset implies the existence of a previsible money-market account. A general expression for the price process of a limited-liability asset is derived. This expression includes two terms, one being the discounted risk-adjusted value of the dividend stream, the other characterising retained earnings. The vanishing of the latter is given by a transversality condition. We show (under the assumed axioms) that, in the case of a limited-liability asset with no permanently-retained earnings, the price process is given by the ratio of a pair of potentials. Explicit examples of discrete-time models are provided

Consumer demand for variety: intertemporal effects of consumption, product switching and pricing policies

The concept of diminishing marginal utility is a cornerstone of economic theory. The consumption of a good typically creates satiation that diminishes the marginal utility of consuming more. Temporal satiation induces consumers to increase their stimulation level by seeking variety and therefore substitute towards other goods (substitutability across time) or other differentiated versions (products) of the good (substitutability across products). The literature on variety-seeking has developed along two strands, each focusing on only one type of substitutability. I specify a demand model that attempts to link these two strands of the literature. This issue is economically relevant because both types of substitutability are important for retailers and manufacturers in designing intertemporal price discrimination strategies. The consumer demand model specified allows consumption to have an enduring effect and the marginal utility of the different products to vary over consumption occasions. Consumers are assumed to make rational purchase decisions by taking into account, not only current and future satiation levels, but also prices and product choices. I then use the model to evaluate the demand implications of a major pricing policy change from hi-low pricing to an everyday low pricing strategy. I find evidence that consumption has a lasting effect on utility that induces substitutability across time and that the median consumer has a taste for variety in her product decisions. Consumers are found to be forward-looking with respect to the duration since the last purchase, to price expectations and product choices. Pricing policy simulations suggest that retailers may increase revenue by reducing the variance of prices, but that lowering the everyday level of prices may be unprofitable.Variety seeking; Intertemporal effects of consumption; product switching; Pricing; Dynamic demand;

The Importance of Being Early

The assumption that the penalty for being early is less than that for being late was put forward by Vickrey (1963) who analyzed how commuters compare penalties in the form of schedule delay (due to peak hour congestion), against penalties in the form of reaching their destination (ahead or behind their desired time of arrival). This assumption has been tested by many researchers since then for various applications, especially in modeling congestion pricing (Arnott et al., 1990) where it is critical to understand the tradeoff between schedule delay and travel delay. Key findings are summarized in the second section of this paper. This research aims to test this hypothesis of earliness being less expensive than lateness using empirical data at different levels and across different regions. New methods to estimate the ratio of earliness to lateness for different types of datasets are developed, which could be used by agencies to implement control policies like congestion pricing or other schemes more accurately. Travel survey data from metropolitan areas provide individual travel patterns while loop detector data provide link level traffic flow data.Schedule Delay, Travel Time, Traffic, Travel Behavior.

From Smile Asymptotics to Market Risk Measures

The left tail of the implied volatility skew, coming from quotes on out-of-the-money put options, can be thought to reflect the market's assessment of the risk of a huge drop in stock prices. We analyze how this market information can be integrated into the theoretical framework of convex monetary measures of risk. In particular, we make use of indifference pricing by dynamic convex risk measures, which are given as solutions of backward stochastic differential equations (BSDEs), to establish a link between these two approaches to risk measurement. We derive a characterization of the implied volatility in terms of the solution of a nonlinear PDE and provide a small time-to-maturity expansion and numerical solutions. This procedure allows to choose convex risk measures in a conveniently parametrized class, distorted entropic dynamic risk measures, which we introduce here, such that the asymptotic volatility skew under indifference pricing can be matched with the market skew. We demonstrate this in a calibration exercise to market implied volatility data.Comment: 24 pages, 4 figure

Russian gas games or well-oiled conflict? Energy security and the 2014 Ukraine crisis

This essay explores the link between energy security and the 2014 Ukraine crisis. Whenever there is an international conflict involving a major oil or gas producer, commentators are often quick to assume a direct link, and the Ukraine crisis was no exception. Yet, the various avenues through which energy politics have affected the Ukraine crisis, and vice versa, are not well understood. This paper seeks to shed light on the issue by addressing two specific questions. First, how exactly did energy contribute to the crisis in the region? Second, can energy be wielded as a ‘weapon’ by Russia, the EU, or the US? We find that Russian gas pricing played a crucial role as a context factor in igniting the Ukrainian crisis, yet at the same time we guard against ‘energy reductionism’, that is, the fallacy of attributing all events to energy-related issues. We also note that there are strict limits to the so-called energy weapon, whoever employs it. In the conclusion we provide a discussion of the policy implications of these findings

Driving Under the (Cellular) Influence: The Link Between Cell Phone Use and Vehicle Crashes

The link between cell phone use while driving and crash risk has in recent years become an area of active research. The most notable of the over 125 studies has concluded that cell phones produce a four-fold increase in relative crash risk comparable to that produced by illicit levels of alcohol. In response, policy makers in fourteen states have either partially or fully restricted driver cell phone use. We investigate the causal link between cellular usage and crash rates by exploiting a natural experiment induced by a popular feature of cell phone plans in recent years'the discontinuity in marginal pricing at 9 pm on weekdays when plans transition from 'peak' to 'off-peak' pricing. We first document a jump in call volume of about 20-30% at 'peak' to 'off-peak' switching times for two large samples of callers from 2000-2001 and 2005. Using a double difference estimator which uses the era prior to price switching as a control (as well as weekends as a second control), we find no evidence for a rise in crashes after 9 pm on weekdays from 2002-2005. The 95% CI of the estimates rules out any increase in all crashes larger than .9% and any increase larger than 2.4% for fatal crashes. These estimates are at odds with the crash risks implied by the existing research. We confirm our results with three additional empirical approaches'we compare trends in cell phone ownership and crashes across areas of contiguous economic activity over time, investigate whether differences in urban versus rural crash rates mirror identified gaps in urban-rural cellular ownership, and finally estimate the impact of legislation banning driver cell phone use on crash rates. None of the additional analyses produces evidence for a positive link between cellular use and vehicle crashes.