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.
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