Econophysical Models of Finance: Baryonic Beta Dynamics and Beyond

Abstract

Econophysics applies the techniques of physics and nonlinear dynamics to complex economic problems. This essay invokes econophysics in order to introduce a theoretical model that aspires to encompass all essential features of real financial markets. It summarizes the central argument of my book, Econophysics and Capital Asset Pricing: Splitting the Atom of Systematic Risk (Palgrave Macmillan 2017). By analogy to quantum chromodynamics and other aspects of the Standard Model of particle physics, that book — and this essay — seek to rehabilitate the capital asset pricing model splitting beta, the basic unit of systematic risk, into subatomic (or “baryonic”) components. This essay then transcends the limitations of Econophysics and Capital Asset Pricing by offering preliminary thoughts on the application of physics to other dimensions of finance. Although Econophysics and Capital Asset Pricing addressed the diffusion of financial information and intertemporal asset pricing, it did not incorporate those subjects into a consciously physical framework. This essay proposes to integrate the baryonic model of beta, essentially a spatial representation of comovement between individual firms, capital markets, and the real economy, with the informational and temporal dimensions of finance.