Jim Chen's SSRN abstracts

Welcome to Jim Chen's SSRN abstracts. This is a human-friendly display of the RSS feed  for Mr. Chen's official SSRN page (http://ssrn.com/author=68651), reorganized by reverse chronological order rather than number of downloads. To receive updates as Mr. Chen posts new papers or updates old papers, please use the following form:

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REVISION: On Exactitude in Financial Regulation: Value-at-Risk, Expected Shortfall, and Expectiles, http://www.ssrn.com/abstract=3136278 (April 18, 2018)

This article reviews two leading measures of financial risk and an emerging alternative. Thanks to their adoption by the Basel accords, VaR and expected shortfall are the leading risk measures in financial regulation. Expectiles offset the known weaknesses of VaR and expected shortfall. Indeed, expectiles are the only elicitable law-invariant coherent risk measures. After reviewing these theoretical properties and practical concerns involving backtesting and robustness, this article more closely examines the potential use of expectiles in finance. Expectiles are most readily evaluated as a special class of quantiles. For ease of regulatory implementation, expectiles can be defined exclusively in terms of VaR, expected shortfall, and the thresholds at which those competing risk measures are enforced. Moreover, expectiles are in harmony with the application of partial moments, gain/loss ratios, and stochastic dominance to financial risk management. Expectiles may address some of the ...
REVISION: Speculative Undertakings: Rate Regulation as a Branch of Corporate Finance, http://www.ssrn.com/abstract=3103627 (January 30, 2018)

The law of regulated industries, particularly the legislative command that the government ensure “just and reasonable rates” for regulated services, is a highly specialized application of financial economics. Ratemaking, to put it bluntly, represents a regulatory exercise in capital asset pricing. As a matter of economics, this article describes ratemaking as a variation on the theme of uncertainty in mathematical finance. As a matter of law, this article describes legal principles guiding the determination of the rate of return on property dedicated to public use. It closely analyzes two regulatory valuation methods derived from the 1923 Bluefield Water Works decision (“attracting capital” and “comparable earnings”), as well as a third approach based on the capital asset pricing model. Discretionary elements in rate regulation make it impossible to wholly alleviate uncertainty in the pricing of utility infrastructure. Utility rate regulation therefore constitutes a speculative ...
REVISION: The Legal Instinct: Lawmaking as a Branch of Biolaw, http://www.ssrn.com/abstract=3099338 (January 23, 2018)

In her 2017 book, Rules for a Flat World, Gillian Hadfield upbraids the legal profession and the legal academy for ascribing supremacy, even exclusivity, to traditional legal institutions. Legal infrastructure, especially in the poorest countries, depends on entrepreneurs willing to shatter these myths. Hadfield prescribes possible solutions to the problem of inspiring and fostering entrepreneurship for legal infrastructure. This review essay describes how Rules for a Flat World envisions the reinvention of markets for legal rules and institutions in the image of Silicon Valley startups. This essay also describes humans’ intrinsic longing for social ordering and dispute resolution. If the legal instinct is biologically based and mediated, then lawmaking should be evaluated as a branch of biolaw.
REVISION: Scholarships at Risk: The Mathematics of Merit Stipulations in Financial Aid Awards, http://www.ssrn.com/abstract=2133018 (January 1, 2018)

Many law schools in the United States condition financial aid grants on the recipients’ maintenance of a certain grade point average. These merit stipulations require students to meet or exceed minimum academic standards in order to keep all or part of their financial aid. Law students should take merit stipulations into account when they decide whether to accept an offer of admission paired with a conditional grant of financial aid. By all accounts, they do not. Law schools should transparently disclose the likely effect of merit stipulations on their financial aid awards. By all accounts, law schools do no such thing. Absent external coercion, they are unlikely to change their current practices. In the absence of industry-wide standards counseling full disclosure of financial aid practices, this article will try to equip law school applicants with the mathematical tools to assess the real impact of merit stipulations on their financial well being. This article first presents very ...
REVISION: Law on the Market? Abnormal Stock Returns and Supreme Court Decision-Making, http://www.ssrn.com/abstract=2649726 (December 20, 2017)

What happens when the Supreme Court of the United States decides a case impacting one or more publicly-traded firms? While many have observed anecdotal evidence linking decisions or oral arguments to abnormal stock returns, few have rigorously or systematically investigated the behavior of equities around Supreme Court actions. In this research, we present the first comprehensive, longitudinal study on the topic, spanning over 15 years and hundreds of cases and firms. Using both intra- and interday data around decisions and oral arguments, we evaluate the frequency and magnitude of statistically-significant abnormal return events after Supreme Court action. On a per-term basis, we find 5.3 cases and 7.8 stocks that exhibit abnormal returns after decision. In total, across the cases we examined, we find 79 out of the 211 cases (37%) exhibit an average abnormal return of 4.4% over a two-session window with an average |t|-statistic of 2.9. Finally, we observe that abnormal ...
REVISION: Baryonic Beta Dynamics: An Econophysical Model of Systematic Risk, http://www.ssrn.com/abstract=3062414 (November 15, 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.
New: Truth and Beauty: Finance in Econophysical Translation, http://www.ssrn.com/abstract=3067353 (November 10, 2017)

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.
REVISION: Econophysical Models of Finance: Baryonic Beta Dynamics and Beyond, http://www.ssrn.com/abstract=3059436 (November 6, 2017)

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 ...
REVISION: From Baryonic Beta Dynamics to Cosmological Consilience: Finance as an Econophysical Romance, http://www.ssrn.com/abstract=3059436 (November 2, 2017)

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 ...
New: Heterodox Antitrust Economics, http://www.ssrn.com/abstract=3032205 (September 7, 2017)

Antitrust economics is a discipline developed by academic economists in concert with the refinement of per se rules and the rule of reason by the Supreme Court. Distinct bodies of antitrust thought — such as the Chicago school, the post-Chicago school, and behavioral antitrust economics — have emerged. These competing schools of thought fall short of capturing the full complexity of economic conduct. Antitrust law cannot and should not seek to replicate often conflicting insights devised by economists. Rather, what antitrust economics can accomplish is at once more modest and more helpful. The laudable resort to economic theory in any of its guises, behavioral or otherwise, should never become detached from economic fundamentals. Antitrust economics and cognate branches of the behavioral sciences should strive to speak of human conduct exactly as it is observed — neither a special magic and accursed, nor preternaturally blessed, but merely here.
REVISION: The Fragile Menagerie: Biodiversity Loss, Climate Change, and the Law, http://www.ssrn.com/abstract=2862882 (July 15, 2017)

The greatest vectors of biodiversity loss in the Anthropocene epoch are climate change, habitat destruction, invasive species, pollution, population, and overkill. Perversely enough, the legal understanding of extinction mechanisms remains frozen in time, like a cave dweller in ice. Climate change, habitat destruction, and alien invasive species should figure more prominently than overkill and the marketing of products derived from endangered species. The law, however, imposes its clearest and harshest sanctions precisely where the drivers of extinction are weakest: when humans consciously capture or kill other living things. The Endangered Species Act has been adapted to address habitat destruction on private land and to mitigate climate change. Nevertheless, the law’s lack of congruence with conservation biology impedes efforts to preserve biodiversity and mitigate climate change.
New: Even-Keeled Moments of Doubt, http://www.ssrn.com/abstract=2967244 (May 13, 2017)

Uncertainty affects all aspects of economics. A principle this vital demands a mathematically precise definition. The distinction between risk and uncertainty, as made by Frank Knight (1921) and John Maynard Keynes (1937), invites the following definition (Anderson, Ghysels & Juergens 2009): An event is risky if its outcome is unknown but the distribution of its outcomes is known. By contrast, an event is uncertain if its outcome is unknown and the distribution of its outcomes is also unknown. In fat-tailed problems where historical evidence does not reflect the true distribution of extreme outcomes, kurtosis approximates uncertainty. This intuition arises from options pricing models where both price and volatility fluctuate stochastically (Heston 1993).

  

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