On the Physics of Expected Asset Returns
A new asset pricing study introduces a dual-state model, splitting expected returns into long-term and short-term components. It finds mean reversion is structurally required, with expectational dispersion decaying exponentially. The Asset Opportunity Space (AOS) sets a theoretical profit limit from market inefficiencies, similar to information theory. The Relativity Theorem shows investors see different opportunities based on their baselines. Analysis of U.S. equities, gold, and Bitcoin confirms these findings, noting Bitcoin’s declining profit potential.
What it examines
This paper introduces a new way to understand asset returns by separating long-term growth from short-term market changes. Using a physics-inspired model, it explains how expected returns can be broken into two parts, without relying on traditional finance assumptions, to better capture market behavior.
What it concludes
The results show that market opportunities and risks depend on each observer’s viewpoint, and that mean reversion is a built-in market feature. This framework can help investors, regulators, and researchers better measure market efficiency and identify trading opportunities. Future work could explore more assets and refine these models.
Evidence objects
A groundbreaking dual-state framework splits asset returns into a long-term baseline and short-term elasticity, revealing mean reversion as a structural necessity, with expectational dispersion decaying exponentially over time.
key_findings bullet 1 · key_findings · validation V0
The Asset Opportunity Space (AOS) introduces a theoretical ceiling on profits from market inefficiencies, likened to maximum information transfer in a noisy channel, fundamentally reshaping how market limits are understood.
key_findings bullet 2 · key_findings · validation V0
The Relativity Theorem shows investors perceive different opportunities based on their baselines, challenging universal pricing; econometric analysis confirms exponential decay and notes Bitcoins profit potential has waned as markets mature.
key_findings bullet 3 · key_findings · validation V0
This paper presents a dual-state framework for expected asset returns, introducing a novel geometric identity independent of traditional assumptions. By establishing new theorems and drawing analogies to physics, it offers original perspectives on mean reversion and market efficiency, making it compelling for its potential to reshape asset pricing theory and practice.
key_findings bullet 4 · key_findings · validation V0
Raw abstract and provenance
This paper introduces a dual-state framework that resolves this entanglement by factoring the expected gross return of any asset into two independent primitives
Source row: 1468 · abstract type: snippet