Baryonic Beta Dynamics: An Econophysical Model of Systematic Risk
36(1) Estudios de Economía Aplicada 263-276 (January 2018)
14 Pages Posted: 1 Nov 2017 Last revised: 25 Aug 2018
Date Written: October 31, 2017
This essay seeks to rehabilitate the capital asset pricing model by splitting beta, the basic unit of systematic risk, into subatomic (or “baryonic”) components. By analogy to quantum chromodynamics and other aspects of the Standard Model of particle physics, this essay bifurcates beta on either side of mean returns and into distinct components reflecting relative volatility and correlation, as well as cash-flow and discount-rate effects. Splitting the atom of systematic risk answers some of the most troubling anomalies and puzzles in finance, including abnormal returns on small-cap and value stocks, the low-volatility anomaly, and the equity premium puzzle.
Keywords: CAPM, small caps, value, beta, physics, Standard Model, low-volatility anomaly, equity risk premium
JEL Classification: A12, B26, G12
Suggested Citation: Suggested Citation