I am proposing a formal framework that treats financial risk not as a scalar probability (variance) but as a conserved vector field.The current paradigm (Basel III / VaR) assumes risk can be destroyed via diversification. My model, ART-2D, argues that risk is conserved: it merely transforms from “Structural Asymmetry” (potential energy/convexity mismatch) into “Informational Asymmetry” (entropy/pricing error).Using coupled Langevin dynamics, I derived a master equation:
Σ=AS×(1+λAI)
The model identifies a deterministic phase transition at Σ≈0.75. Beyond this point, the system loses metastability and collapse becomes a deterministic outcome of the network topology, regardless of the specific trigger.Empirical Validation:2008 GFC: The indicator crossed 0.75 in Aug 2007 (13 months pre-Lehman).Terra/Luna: The indicator crossed 0.75 five days before the de-peg.I have uploaded the full derivation and backtests here:
I am looking for critiques on:The validity of mapping thermodynamic entropy to market “pricing error”.Whether the “Clawback” mechanism I propose is robust against Goodhart’s Law.
Proposal: A conserved quantity for systemic risk (ART-2D) and its phase transition threshold
I am proposing a formal framework that treats financial risk not as a scalar probability (variance) but as a conserved vector field.The current paradigm (Basel III / VaR) assumes risk can be destroyed via diversification. My model, ART-2D, argues that risk is conserved: it merely transforms from “Structural Asymmetry” (potential energy/convexity mismatch) into “Informational Asymmetry” (entropy/pricing error).Using coupled Langevin dynamics, I derived a master equation:
Σ=AS×(1+λAI)
The model identifies a deterministic phase transition at Σ≈0.75. Beyond this point, the system loses metastability and collapse becomes a deterministic outcome of the network topology, regardless of the specific trigger.Empirical Validation:2008 GFC: The indicator crossed 0.75 in Aug 2007 (13 months pre-Lehman).Terra/Luna: The indicator crossed 0.75 five days before the de-peg.I have uploaded the full derivation and backtests here:
[Zenodo Paper]
Request for feedback:
I am looking for critiques on:The validity of mapping thermodynamic entropy to market “pricing error”.Whether the “Clawback” mechanism I propose is robust against Goodhart’s Law.