Beta inversion effect of COVID-19 pandemic using capital asset pricing model

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Mohammad Al-Dwiry ORCID logo, Weaam Amira

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This paper aims to analyze the effect of the beta inversion on COVID-19 by applying the capital asset pricing model and difference-in-differences (DiD) model in the US covering the five-year period from April 26, 2017, to April 22, 2022. Coronavirus induced pandemic has altered the fundamentals of the market (Baker, Bloom, Davis, Kost, et al., 2020; Mazur et al., 2021). The higher the value beta, the greater the potential for better long-term returns, according to the capital asset pricing model (CAPM). This study showed that companies that appeared to be safe to invest in are suddenly more dangerous, and the opposite is also true. Such as industries that previously shown a contractionary effect — aviation and retail, during COVID-19 have shown more benign effects on the market. The DiD model also reveals the same. The World Health Organization (WHO) intervention had a negligible effect on the treatment group, according to the model. It is obvious that beta has been inverted before investing in these sectors. The companies that are expected to perform better like pharma and biotech, have underperformed. This study deploys the understanding of the capital asset pricing model to see how different markets performed during and before the pandemic.

Keywords: Capital Asset Pricing Model (CAPM), COVID-19, Asset Pricing, S&P Select Industry Indices, Beta and Jensen’s Alpha

Authors’ individual contribution: Conceptualization — M.A.-D. and W.A.; Methodology — M.A.-D. and W.A.; Software — W.A.; Validation — M.A.-D. and W.A.; Formal Analysis — M.A.-D. and W.A.; Investigation — M.A.-D. and W.A.; Resources — M.A.-D. and W.A.; Data Curation — M.A.-D. and W.A.; Writing — Original Draft — M.A.-D. and W.A.; Writing — Review & Editing — M.A.-D. and W.A.; Visualization — M.A.-D. and W.A.; Supervision — M.A.-D. and W.A.; Project Administration — M.A.-D.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G00, G10, G12

Received: 22.06.2022
Accepted: 07.03.2023
Published online: 09.03.2023

How to cite this paper: Al-Dwiry, M., & Amira, W. (2023). Beta inversion effect of COVID-19 pandemic using capital asset pricing model [Special issue]. Journal of Governance & Regulation, 12(1), 252–259.