As a follow-up to my previous post in honor of my late colleague and friend Ray Sturm (pictured below), who died recently at the too-early age of 58, today I am a posting a link to his beautiful 2008 paper “Does time have value? An empirical examination of the put option embedded in refundable U.S. air fares,” a research article that Ray co-authored with Drew Winters, a respected professor of finance at Texas Tech.

To the point of this post, of the two dozen or so scholarly papers that Ray published during his academic career, his 2008 time-value paper is one my favorites because of its “Coasean spirit” — i.e. the way in which Ray and Drew combine economic theory and actual practice. Below is an excerpt (footnote omitted):

“The time value of money is a fundamental tenet of finance. Specifically, under any positive discount rate, a dollar today is unambiguously worth more than a dollar tomorrow. Equally unambiguous is the value of time in the price of an option. Specifically, all standard put and call options increase in value as the time to expiration increases. In this paper, we examine ticket pricing in the airline industry and argue that the price of a refundable airline ticket consists of two components—the price of a nonrefundable ticket plus the price of a put option. The refundable ticket is obviously more valuable than the nonrefundable because the put option component gives the owner the right to sell the ticket back to the airline at its original cost. Accordingly, we apply the standard relationship between time to expiration and the value of an option developed in option pricing theory to determine whether airlines price the value of time to expiration in the put option embedded in refundable ticket prices in a manner consistent with theory.”