Urban Congestion as a Volatility Pricing Problem: A Call–Put Options Framework with Black–Scholes Travel Time Valuation

Abstract

Paul T E Cusack

This paper develops a unified financial-economics framework for urban congestion in which travel time is treated as a stochastic asset with density-dependent volatility. Automobile travel is modeled as a call option on low-congestion travel time, while transit and avoidance behavior act as put-like hedges against congestion risk. We embed a Black–Scholes- type valuation framework to price travel-time uncertainty and derive a congestion pricing rule equivalent to an option premium. Marginal external costs are shown to scale convexly with congestion-induced volatility, providing a structural basis for congestion pricing in urban systems.

PDF