Econophysics and Capital Asset Pricing: Splitting the Atom of Systematic Risk

by James Ming Chen

Overview

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.

Product Details

ISBN-13:	9783319634647
Publisher:	Springer International Publishing
Publication date:	10/04/2017
Series:	Quantitative Perspectives on Behavioral Economics and Finance
Edition description:	1st ed. 2017
Pages:	287
Product dimensions:	5.83(w) x 8.27(h) x (d)

About the Author

James Ming Chen holds the Justin Smith Morrill Chair in Law at Michigan State University, USA. His books, Disaster Law and Policy, Postmodern Portfolio Theory, and Finance and the Behavioral Prospect cover a broad range of issues concerning extreme events and risk management, from natural to financial disasters. He is of counsel to the Technology Law Group of Washington, DC; a public member of the Administrative Conference of the United States; and an elected member of the American Law Institute. A magna cum laude graduate of Harvard Law School and a former editor of the Harvard Law Review, Chen also served as a clerk to Justice Clarence Thomas of the Supreme Court of the United States.

Table of Contents

1. Baryonic Beta Dynamics: The Econophysics of Systematic Risk.- 2. Double- and Single-Sided Risk Measures.- 3. Relative Volatility Versus Correlation Tightening.- 4. Asymmetrical Volatility and Spillover Effects.- 5. The Low-Volatility Anomaly.- 6. Correlation Tightening.- 7. The Intertemporal Capital Asset Pricing Model.- 8. The Equity Premium Puzzle.- 9. Beta’s Cash-Flow and Discount-Rate Components.- 10. Risk and Uncertainty.- 11. Short-Term Price Continuation Anomalies.- 12. Systematic Risk in the Macrocosmos.- 13. The Baryonic Ladder: The Firm, the Market, and the Economy.

Editorial Reviews

The book is more suitable for market practitioners than for financial mathematicians since the mathematical description is relatively well known. It can, however, shed new light on the well-known and widely used CAPM and maybe motivate some practitioners to adopt more accurate models of capital asset pricing. Therefore I recommend this book for readers who have not encountered econophysics yet and who are not familiar with advanced mathematical models of asset pricing.” (Jan Korbel, Mathematical Reviews, October, 2019)

From the Publisher