A lattice framework for pricing display advertisement options with the stochastic volatility underlying model

Chen, Bowei and Wang, Jun (2015) A lattice framework for pricing display advertisement options with the stochastic volatility underlying model. Electronic Commerce Research and Applications, 14 (6). pp. 465-479. ISSN 1567-4223

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Abstract

Advertisement (abbreviated ad) options are a recent development in online advertising. Simply, an ad option is a first look contract in which a publisher or search engine grants an advertiser a right but not obligation to enter into transactions to purchase impressions or clicks from a specific ad slot at a pre-specified price on a specific delivery date. Such a structure provides advertisers with more flexibility of their guaranteed deliveries. The valuation of ad options is an important topic and previous studies on ad options pricing have been mostly restricted to the situations where the underlying prices follow a geometric Brownian motion (GBM). This assumption is reasonable for sponsored search; however, some studies have also indicated that it is not valid for display advertising. In this paper, we address this issue by employing a stochastic volatility (SV) model and discuss a lattice framework to approximate the proposed SV model in option pricing. Our developments are validated by experiments with real advertising data: (i) we find that the SV model has a better fitness over the GBM model; (ii) we validate the proposed lattice model via two sequential Monte Carlo simulation methods; (iii) we demonstrate that advertisers are able to flexibly manage their guaranteed deliveries by using the proposed options, and publishers can have an increased revenue when some of their inventories are sold via ad options.

Keywords:Online advertising, Guaranteed delivery, First look contract, Advertisement option, Option pricing, Lattice framework, Stochastic volatility, NotOAChecked
Subjects:G Mathematical and Computer Sciences > G500 Information Systems
G Mathematical and Computer Sciences > G330 Stochastic Processes
N Business and Administrative studies > N300 Finance
G Mathematical and Computer Sciences > G400 Computer Science
N Business and Administrative studies > N500 Marketing
Divisions:College of Science > School of Computer Science
ID Code:19632
Deposited On:20 Nov 2015 20:06

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