An estimated 200 million people use public transport worldwide. It is the preferred mode of transport throughout much of Asia and Europe. Every day over 65,000 people use public transport to commute to work in New Zealand. Since 2000 its use has grown 7.5% each year in this country. It is perceived as a cost effective, environmentally friendly alternative to private transport. Another advantage that public transport operators are striving to promote is that of convenience. Part of this challenge is embodied in public transport ticketing.
Ease of use, as required by the customer, includes simplistic methods for ticket purchase, verification and value adding in the case of reusable tickets. Verification processes usually occur at the point of boarding the transportation, whilst value adding has traditionally been conducted at ticketing agents. The needs of the operators include ticket security, data collection and the prevention of fraud, such as ‘over-riding’ or ‘crowding-in’.
Peters (1989, 1994) of PanAgora Management suggests that, to understand financial turbulence, the dynamics of cash flows between the various market participants, within and between different asset markets, should be analyzed and measured more carefully. Although there exists not yet a complete theory of physical turbulence, let alone a theory of financial turbulence, many parallels between the two phenomena have been noted by, for example, Mandelbrot (1982, 1998).
Simultaneously, the accurate measurement of financial illiquidity and of financial illiquidity risk has gained in importance, as the example of the tax payer financed bail - out of the collapsed Long Term Capital Management (LTCM) hedge fund in 1998 demonstrates. This hedge fund applied a trading strategy known as convergence arbitrage, which is based on the idea that if two securities have the same theoretical price, because they have the same return risk profile, their market prices should eventually be the same. But this convergence strategy ignores the observation that financial risk is a time dependent phenomenon and not a time - independent phenomenon to which the usual central limit theory based on i.i.d. assumptions applies. Indeed, in the summer of 1998 LTCM made a huge $4 billion loss. This was triggered when Russia defaulted on its debt, which caused a flight to quality in the German bond market.
Labor income accounts for about two thirds of national income in the U.S. and, since the seminal work of Mayers (1973), it has been assumed to play an important role in theoretical asset pricing. In studies such as Bodie, Merton, and Samuelson (1992), Danthine and Donaldson (2002), Qin (2002), Santos and Veronesi (2006) and Parlour and Walden (2010), risky labor income or more generally, human capital risk affects investors’ portfolio decisions, which in turn has general equilibrium asset pricing implications. Broadly, the theory suggests that the behavior of capital markets can only be understood together with labor markets. More specifically, the theory suggests that an important function of capital markets is to allow investors to hedge their labor income risk.
