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.
