The Effects of the COVID-19 Pandemic on CAPM Reliability in the Financial Sector

Chongling Chen

doi:10.54097/f50e3e22

Authors

Chongling Chen New Channel, Hangzhou, 310000, China

DOI:

https://doi.org/10.54097/f50e3e22

Keywords:

CAPM, COVID-19, financial industry.

Abstract

The Capital Asset Pricing Model (CAPM) is a basic part of financial theory, but its real-world validity—particularly in China's stock market—remains debated. Due to reasons like government policy regulation and different composition of investors by type. This study examines the financial industry using monthly data for 71 sector stocks and 1,498 market stocks from the Shanghai Stock Exchange. Perform the regression to estimate beta and alpha coefficients. Compare two periods: the peak of the COVID-19 pandemic in 2020 and the period after the pandemic in 2024. The result shows that during the pandemic, the CAPM model fits both the market and the industry well, showing significant beta coefficients, minimal alpha coefficients, and strong explanatory power. After the pandemic, the model still applies to the financial sector—now with all portfolio beta coefficients above 1—but its relevance to the broader market diminishes. The study discusses how COVID-19 pandemic influences the financial sector, analyses the value of the use of the CAPM model under certain market circumstances.

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