Does time have value? An empirical examination of the put option embedded in refundable U.S. air fares

Ray R. Sturm, Drew B. Winters

Research output: Contribution to journalArticle

Abstract

The unprofitable history of the airline industry raises questions about how effectively airlines price their product. In this study, we use option pricing theory to examine the value of the put option embedded in refundable airline tickets. Specifically, we examine whether the time to expiration of the embedded put option is properly priced. Compiling daily real-time ticket price data for Delta and Southwest over 3.5 months, we find little evidence to suggest that airlines price the value of time in the embedded put option. However, we do find evidence suggesting that options are priced higher on business-dominated routes than on vacation-dominated routes.

Original languageEnglish
Pages (from-to)376-392
Number of pages17
JournalJournal of Economics and Finance
Volume33
Issue number4
DOIs
StatePublished - Oct 2009

Keywords

  • Airlines
  • Contingent claims
  • Options
  • Ticket pricing

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