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Econophysics and Capital Asset Pricing

Splitting the Atom of Systematic Risk

  • James Ming Chen

Table of contents

  1. Front Matter
    Pages i-xvi
  2. The First Generation: Addressing Markets Up and Down

    1. Front Matter
      Pages 1-1
    2. James Ming Chen
      Pages 31-45
  3. The Second Generation: The Strange Charm of Volatility and Correlation

    1. Front Matter
      Pages 47-47
    2. James Ming Chen
      Pages 65-86
    3. James Ming Chen
      Pages 87-98
    4. James Ming Chen
      Pages 99-124
  4. The Third Generation: Truth and Beauty in Cash-Flow and Discount-Rate Effects

    1. Front Matter
      Pages 125-125
    2. James Ming Chen
      Pages 127-138
    3. James Ming Chen
      Pages 139-173
    4. James Ming Chen
      Pages 175-187
    5. James Ming Chen
      Pages 189-211
    6. James Ming Chen
      Pages 213-237
    7. James Ming Chen
      Pages 239-274
  5. Back Matter
    Pages 285-287

About this book

Introduction

This book rehabilitates beta as a definition of systemic risk by using particle physics to evaluate discrete components of financial risk. Much of the frustration with beta stems from the failure to disaggregate its discrete components; conventional beta is often treated as if it were "atomic" in the original Greek sense: uncut and indivisible. By analogy to the Standard Model of particle physics theory's three generations of matter and the three-way interaction of quarks, Chen divides beta as the fundamental unit of systemic financial risk into three matching pairs of "baryonic" components. The resulting econophysics of beta explains no fewer than three of the most significant anomalies and puzzles in mathematical finance. Moreover, the model's three-way analysis of systemic risk connects the mechanics of mathematical finance with phenomena usually attributed to behavioral influences on capital markets. Adding consideration of volatility and correlation, and of the distinct cash flow and discount rate components of systematic risk, harmonizes mathematical finance with labor markets, human capital, and macroeconomics.

Keywords

quantum chromodynamics quarks behavioral portfolio theory SP/A theory baryons Fama-French three-factor model Bowman's risk-return paradox equity premium puzzle

Authors and affiliations

  • James Ming Chen
    • 1
  1. 1.College of LawMichigan State UniversityEast LansingUSA

Bibliographic information

  • DOI https://doi.org/10.1007/978-3-319-63465-4
  • Copyright Information The Editor(s) (if applicable) and The Author(s) 2017
  • Publisher Name Palgrave Macmillan, Cham
  • eBook Packages Economics and Finance
  • Print ISBN 978-3-319-63464-7
  • Online ISBN 978-3-319-63465-4
  • Buy this book on publisher's site