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

James Ming Chen

Michigan State University - College of Law

Date Written: October 31, 2017

Abstract

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

Chen, James Ming, Baryonic Beta Dynamics: An Econophysical Model of Systematic Risk (October 31, 2017). 36(1) Estudios de Economía Aplicada 263-276 (January 2018). Available at SSRN: https://ssrn.com/abstract=3062414 or http://dx.doi.org/10.2139/ssrn.3062414

James Ming Chen (Contact Author)

Michigan State University - College of Law ( email )

318 Law College Building
East Lansing, MI 48824-1300
United States

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