The applied computer science of economic analyses: Internet prioritization and Internet pricing, and software engineering and software pricing for the mass market

This research examines evolving issues in applied computer science and applies economic and business analyses as well. There are two main areas. The first is internetwork communications as embodied by the Internet. The goal of the research is to devise an efficient pricing, prioritization, and incentivization plan that could be realistically implemented on the existing infrastructure. Criteria include practical and economic efficiency, and proper incentives for both users and providers. Background information on the evolution and functional operation of the Internet is given, and relevant literature is surveyed and analyzed. Economic analysis is performed on the incentive implications of the current pricing structure and organization. The problems are identified, and minimally disruptive solutions are proposed for all levels of implementation to the lowest level protocol. Practical issues are considered and performance analyses are done. The second area of research is mass market software engineering, and how this differs from classical software engineering. Software life-cycle revenues are analyzed and software pricing and timing implications are derived. A profit maximizing methodology is developed to select or defer the development of software features for inclusion in a given release. An iterative model of the stages of the software development process is developed, taking into account new communications capabilities as well as profitability. ^

Liquidity and asset pricing: A comparison between three-factor and three-moment capital asset pricing models

Liquidity is an important attribute of an asset that investors would like to take into consideration when making investment decisions. However, the previous empirical evidence whether liquidity is a determinant of stock return is not unanimous. This dissertation provides a very comprehensive study about the role of liquidity in asset pricing using the Fama-French (1993) three-factor and Kraus and Litzenberger (1976) three-moment CAPM as models for risk adjustment. The relationship between liquidity and well-known determinants of stock returns such as size and book-to-market are also investigated. This study examines the liquidity and asset pricing issues for both intertemporal as well as cross-sectional data. ^ The results indicate an existence of a liquidity premium, i.e., less liquid stocks would demand higher rate of return than more liquid stocks. More specifically, a drop of 1 percent in liquidity is associated with a higher rate of return of about 2 to 3 basis points per month. Further investigation reveals that neither the Fama-French three-factor model nor the three-moment CAPM captures the liquidity premium. Finally, the results show that well-known determinants of stock return such as size and book-to-market do not serve as proxy for liquidity. ^ Overall, this dissertation shows that a liquidity premium exists in the stock market and that liquidity is a distinct effect, and is not influenced by the presence of non-market factors, market factors and other stock characteristics.^

Estimation of global beta and tests of capital asset pricing models

With the rapid globalization and integration of world capital markets, more and more stocks are listed in multiple markets. With multi-listed stocks, the traditional measurement of systematic risk, the domestic beta, is not appropriate since it only contain information from one market. ^ Prakash et al. (1993) developed a technique, the global beta, to capture information from multiple markets wherein the stocks are listed. In this study, the global betas are obtained as well as domestic betas for 704 multi-listed stocks from 59 world equity markets. Welch tests show that domestic betas are not equal across markets, therefore, global beta is more appropriate in a global investment setting. ^ The traditional Capital Asset Pricing Models (CAPM) is also tested with regards to both domestic beta and global beta. The results generally support the positive relationship between stocks returns and global beta while tend to reject this relationship between stocks returns and domestic beta. Further tests of International CAPM with domestic beta and global beta strengthen the conclusion.^

Three essays on asset pricing

In this dissertation, I investigate three related topics on asset pricing: the consumption-based asset pricing under long-run risks and fat tails, the pricing of VIX (CBOE Volatility Index) options and the market price of risk embedded in stock returns and stock options. These three topics are fully explored in Chapter II through IV. Chapter V summarizes the main conclusions. In Chapter II, I explore the effects of fat tails on the equilibrium implications of the long run risks model of asset pricing by introducing innovations with dampened power law to consumption and dividends growth processes. I estimate the structural parameters of the proposed model by maximum likelihood. I find that the stochastic volatility model with fat tails can, without resorting to high risk aversion, generate implied risk premium, expected risk free rate and their volatilities comparable to the magnitudes observed in data. In Chapter III, I examine the pricing performance of VIX option models. The contention that simpler-is-better is supported by the empirical evidence using actual VIX option market data. I find that no model has small pricing errors over the entire range of strike prices and times to expiration. In general, Whaley’s Black-like option model produces the best overall results, supporting the simpler-is-better contention. However, the Whaley model does under/overprice out-of-the-money call/put VIX options, which is contrary to the behavior of stock index option pricing models. In Chapter IV, I explore risk pricing through a model of time-changed Lvy processes based on the joint evidence from individual stock options and underlying stocks. I specify a pricing kernel that prices idiosyncratic and systematic risks. This approach to examining risk premia on stocks deviates from existing studies. The empirical results show that the market pays positive premia for idiosyncratic and market jump-diffusion risk, and idiosyncratic volatility risk. However, there is no consensus on the premium for market volatility risk. It can be positive or negative. The positive premium on idiosyncratic risk runs contrary to the implications of traditional capital asset pricing theory.

A methodology to estimate time varying user responses to travel time and travel time reliability in a road pricing environment

Road pricing has emerged as an effective means of managing road traffic demand while simultaneously raising additional revenues to transportation agencies. Research on the factors that govern travel decisions has shown that user preferences may be a function of the demographic characteristics of the individuals and the perceived trip attributes. However, it is not clear what are the actual trip attributes considered in the travel decision- making process, how these attributes are perceived by travelers, and how the set of trip attributes change as a function of the time of the day or from day to day. In this study, operational Intelligent Transportation Systems (ITS) archives are mined and the aggregated preferences for a priced system are extracted at a fine time aggregation level for an extended number of days. The resulting information is related to corresponding time-varying trip attributes such as travel time, travel time reliability, charged toll, and other parameters. The time-varying user preferences and trip attributes are linked together by means of a binary choice model (Logit) with a linear utility function on trip attributes. The trip attributes weights in the utility function are then dynamically estimated for each time of day by means of an adaptive, limited-memory discrete Kalman filter (ALMF). The relationship between traveler choices and travel time is assessed using different rules to capture the logic that best represents the traveler perception and the effect of the real-time information on the observed preferences. The impact of travel time reliability on traveler choices is investigated considering its multiple definitions. It can be concluded based on the results that using the ALMF algorithm allows a robust estimation of time-varying weights in the utility function at fine time aggregation levels. The high correlations among the trip attributes severely constrain the simultaneous estimation of their weights in the utility function. Despite the data limitations, it is found that, the ALMF algorithm can provide stable estimates of the choice parameters for some periods of the day. Finally, it is found that the daily variation of the user sensitivities for different periods of the day resembles a well-defined normal distribution.

Empowering Catering Sales Managers with Pricing Authority

In the hotel business, catering sales managers often encounter potential clients who expect to negotiate for items such as room rental fees, audiovisual charges, and bartending fees. This article addresses both the advantages and disadvantages of empowering sales managers with the authority to reduce or waive these charges. Thus, hoteliers are advised to extend a structured yield management mindset into the hotel’s function-space area.

Pricing in the Hospitality Industry: An Implicit Markets Approach

The authors apply economic theory to an analysis of industry pricing. Data from a cross-section of San Francisco hotels is used to estimate the implicit prices of common hotel amenities, and a procedure for using these prices to estimate consumer demands for the attributes is outlined. The authors then suggest implications for hotel decision makers. While the results presented here should not be generalized to other markets, the methodology is easily adapted to other geographic areas.

A Relationship of Wine Ratings and Wholesale Pricing, Vintage, Variety, and Region

Wine reviews, such as those from Wine Spectator and other consumer publications, help drive wine sales. The researchers in this study utilized standardized wholesale “line pricing” from a major wholesale distributor in the Southwest to compare pricing to the ratings published by Wine Spectator and to determine whether there were any correlations among other key attributes of the wine. The study produced interesting results, including that the wholesale price and vintage of a wine are significant in the prediction of the wine’s rating.

Global Pricing Strategy for a Quick-Service Restaurant Chain

The purpose of this paper is to compare prices for a popular quick-service restaurant chain (i.e. McDonalds’) across countries throughout the world using the “Big Mac Index” published by “The Economist.” The index was originally developed to measure the valuation of international currencies against the U.S. dollar. The analysis in this study examines the relationship between the price of a Big Mac and other variables such as the cost of beef, price elasticity, and income. Finally, these relationships are reviewed to draw inferences concerning the use of demand, costs, and competition in setting prices.

Indirect Cost Factors In Menu Pricing

In the discussion - Indirect Cost Factors in Menu Pricing – by David V. Pavesic, Associate Professor, Hotel, Restaurant and Travel Administration at Georgia State University, Associate Professor Pavesic initially states: “Rational pricing methodologies have traditionally employed quantitative factors to mark up food and beverage or food and labor because these costs can be isolated and allocated to specific menu items. There are, however, a number of indirect costs that can influence the price charged because they provide added value to the customer or are affected by supply/demand factors. The author discusses these costs and factors that must be taken into account in pricing decisions. Professor Pavesic offers as a given that menu pricing should cover costs, return a profit, reflect a value for the customer, and in the long run, attract customers and market the establishment. “Prices that are too high will drive customers away, and prices that are too low will sacrifice profit,” Professor Pavesic puts it succinctly. To dovetail with this premise the author provides that although food costs measure markedly into menu pricing, other factors such as equipment utilization, popularity/demand, and marketing are but a few of the parenthetic factors also to be considered. “… there is no single method that can be used to mark up every item on any given restaurant menu. One must employ a combination of methodologies and theories,” says Professor Pavesic. “Therefore, when properly carried out, prices will reflect food cost percentages, individual and/or weighted contribution margins, price points, and desired check averages, as well as factors driven by intuition, competition, and demand.” Additionally, Professor Pavesic wants you to know that value, as opposed to maximizing revenue, should be a primary motivating factor when designing menu pricing. This philosophy does come with certain caveats, and he explains them to you. Generically speaking, Professor Pavesic says, “The market ultimately determines the price one can charge.” But, in fine-tuning that decree he further offers, “Lower prices do not automatically translate into value and bargain in the minds of the customers. Having the lowest prices in your market may not bring customers or profit. “Too often operators engage in price wars through discount promotions and find that profits fall and their image in the marketplace is lowered,” Professor Pavesic warns. In reference to intangibles that influence menu pricing, service is at the top of the list. Ambience, location, amenities, product [i.e. food] presentation, and price elasticity are discussed as well. Be aware of price-value perception; Professor Pavesic explains this concept to you. Professor Pavesic closes with a brief overview of a la carte pricing; its pros and cons.

Online Pricing Practice for Hotel Room Rates in China: The Case of Shanghai

Travel websites that enable hotel room reservations have created unprecedented business opportunities. However, they have also overloaded hotel customers with information. This situation is particularly true of China, an emerging country with the largest population in the world and the most promising growth prospect in tourism. This study investigated the room-rate pricing practice of five online distribution channels, measured by the lowest available rates. These online channels priced hotels of different categories in Shanghai, China’s largest city. Empirical findings indicated that local websites offered lower room rates than international websites for the selected hotels in different categories. Specifically, Chinatravel consistently offered the lowest room rates for the selected hotels.

An examination of the within -product category versus across -product category effects of partially comparative pricing

Partially comparative pricing involves a featured store providing price comparisons in reference to a competitor for some products (comparatively priced products) while omitting such comparisons and providing only its price for other products (non-comparatively priced products). Barone, Manning and Miniard (2004) found that while partially comparative pricing enhanced consumers' price perceptions of comparatively priced products at the featured retailer, it had the opposite effect for non-comparatively priced products (i.e., an inferiority effect). To the contrary, it is argued that a price comparison for one brand in a product category may enhance consumers' price perceptions of the remaining, non-comparatively priced brands within the same product category (i.e., a superiority effect). This research seeks to (a) examine the robustness of partially comparative pricing's effect in an across-product category context compared to a within-product category context and (b) extend the understanding of partially comparative pricing's within-product category effect on non-comparatively priced brands by examining potential moderators of this effect: brand diversity, brand typicality, and the relative expensiveness of the brand receiving the price comparison. The findings of four studies provide evidence to support the presence of a superiority effect in a within-product category context and suggests that the adverse effect of partially comparative pricing in an across-product category context may not be as robust as previously thought. Although the superiority effect was unaffected by brand diversity (i.e., whether the brands emanated from different manufacturers or from a single manufacturer), it was found to be moderated by the typicality of the brand receiving the price comparison as well as the comparison brand's relative expensiveness. Research participants formed more favorable relative price beliefs about the non-comparatively priced brand when the comparatively priced brand was perceived as a more typical member of the product category. Similarly, participants formed more favorable beliefs about the non-comparatively priced brand when the comparison price was assigned to the most expensive brand in the product category rather than the least expensive brand.

Audit pricing, reporting quality, and auditor switches in the post -SOX period

The Sarbanes-Oxley Act represents an important watershed event in the history and regulation of the accounting profession. In this dissertation, I develop arguments as to why we can expect differences in auditor behavior before and after SOX and empirically test if indeed there were differences in auditor behavior before and after SOX. My dissertation consists of three essays. For the three essays, I investigate issues related to auditor independence, audit pricing, the impact of auditor changes in the post-SOX period. The motivation for the first part of my research comes from the SEC's assertions that there are differences between types of non-audit services in terms of their potential to adversely impact auditor independence. The first part of my dissertation empirically validates the SEC's assertions that auditors would be more conservative in those instances where the tax and other non-audit services fee ratios are high but not when the audit-related fee ratio is high. The second part of my study examines if auditors are less likely to "low ball" their audit fees in the period after SOX than in the period preceding SOX. Legislators, regulators, and the media have expressed concerns that auditors "low ball" the fees for initial year audits and that such low-balling can lead to reduced audit quality. I find that there is significant initial year audit fee discount in pre-SOX period and but the fee discount does not hold in post-SOX periods. The third part of my dissertation examines the association between auditor switches and auditor conservatism. I find that a large portion of Big 4 clients switch to non-Big 4 auditors and there is no significant evidence indicating that successor auditors are more conservative in the post-SOX period.

Liquidity, governance and adverse selection in asset pricing

A plethora of recent literature on asset pricing provides plenty of empirical evidence on the importance of liquidity, governance and adverse selection of equity on pricing of assets together with more traditional factors such as market beta and the Fama-French factors. However, literature has usually stressed that these factors are priced individually. In this dissertation we argue that these factors may be related to each other, hence not only individual but also joint tests of their significance is called for. ^ In the three related essays, we examine the liquidity premium in the context of the finer three-digit SIC industry classification, joint importance of liquidity and governance factors as well as governance and adverse selection. Recent studies by Core, Guay and Rusticus (2006) and Ben-Rephael, Kadan and Wohl (2010) find that governance and liquidity premiums are dwindling in the last few years. One reason could be that liquidity is very unevenly distributed across industries. This could affect the interpretation of prior liquidity studies. Thus, in the first chapter we analyze the relation of industry clustering and liquidity risk following a finer industry classification suggested by Johnson, Moorman and Sorescu (2009). In the second chapter, we examine the dwindling influence of the governance factor if taken simultaneously with liquidity. We argue that this happens since governance characteristics are potentially a proxy for information asymmetry that may be better captured by market liquidity of a company's shares. Hence, we jointly examine both the factors, namely, governance and liquidity - in a series of standard asset pricing tests. Our results reconfirm the importance of governance and liquidity in explaining stock returns thus independently corroborating the findings of Amihud (2002) and Gompers, Ishii and Metrick (2003). Moreover, governance is not subsumed by liquidity. Lastly, we analyze the relation of governance and adverse selection, and again corroborate previous findings of a priced governance factor. Furthermore, we ascertain the importance of microstructure measures in asset pricing by employing Huang and Stoll's (1997) method to extract an adverse selection variable and finding evidence for its explanatory power in four-factor regressions.^

Three Essays on Asset Pricing

In this dissertation, I investigate three related topics on asset pricing: the consumption-based asset pricing under long-run risks and fat tails, the pricing of VIX (CBOE Volatility Index) options and the market price of risk embedded in stock returns and stock options. These three topics are fully explored in Chapter II through IV. Chapter V summarizes the main conclusions. In Chapter II, I explore the effects of fat tails on the equilibrium implications of the long run risks model of asset pricing by introducing innovations with dampened power law to consumption and dividends growth processes. I estimate the structural parameters of the proposed model by maximum likelihood. I find that the stochastic volatility model with fat tails can, without resorting to high risk aversion, generate implied risk premium, expected risk free rate and their volatilities comparable to the magnitudes observed in data. In Chapter III, I examine the pricing performance of VIX option models. The contention that simpler-is-better is supported by the empirical evidence using actual VIX option market data. I find that no model has small pricing errors over the entire range of strike prices and times to expiration. In general, Whaley’s Black-like option model produces the best overall results, supporting the simpler-is-better contention. However, the Whaley model does under/overprice out-of-the-money call/put VIX options, which is contrary to the behavior of stock index option pricing models. In Chapter IV, I explore risk pricing through a model of time-changed Lévy processes based on the joint evidence from individual stock options and underlying stocks. I specify a pricing kernel that prices idiosyncratic and systematic risks. This approach to examining risk premia on stocks deviates from existing studies. The empirical results show that the market pays positive premia for idiosyncratic and market jump-diffusion risk, and idiosyncratic volatility risk. However, there is no consensus on the premium for market volatility risk. It can be positive or negative. The positive premium on idiosyncratic risk runs contrary to the implications of traditional capital asset pricing theory.