Truth and Beauty: Finance in Econophysical Translation

Abstract

My recent book, Econophysics and Capital Asset Pricing: Splitting the Atom of Systematic Risk, splits beta, the capital asset pricing model’s basic unit of systematic risk, into subatomic (or “baryonic”) components, by analogy to the Standard Model of particle physics. This essay offers preliminary thoughts on the application of physics to other dimensions of finance. A more comprehensive approach would integrate Econophysics and Capital Asset Pricing’s spatial representation of comovement between individual firms, capital markets, and the real economy, with the informational and temporal dimensions of finance. This essay also places efforts at representing finance through physics in their broader scientific and aesthetic context.

Keywords: econophysics, capital asset pricing, CAPM, physics, efficient market hypothesis, comovement, procyclicality

JEL Classification: A12, B26, G12