Covid-19’s effect on the alpha and beta of a US stock Exchange Traded Fund

ABSTRACT

This paper is a first look of Covid-19’s effect on the alpha and beta of a US stock exchange traded fund. It uses the efficient market hypothesis and the J-test of non-nested hypotheses to identify a reasonable choice of Covid-19 data for estimating CAPM regressions. Obtained through the generalized method of moments in a panel data analysis, a reasonable choice is Covid-19 spread’s unanticipated severity. Rising unanticipated severity significantly reduces the alphas and betas of mid-cap and small-cap ETFs but not large-cap and sector & speciality ETFs. Hence, retail investors should not market time or panic liquidate, especially when successful vaccination development is likely in the near future.

KEYWORDS:

• Covid-19
• CAPM
• stock ETFs
• J-test
• GMM estimation

JEL CLASSIFICATION:

• G10
• G18
• I10
• I18

Acknowledgment

C.K. Woo’s research is funded by research grants (#4388 and #4400) from the Education University of Hong Kong. Without implications, all errors are ours.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ https://covid19.who.int/?gclid=EAIaIQobChMI6Ya3qNWZ6wIVSVRgCh0ASQJtEAAYASAAEgJo_vD_BwE

² Description of Vanguard’s stock ETFs is available at https://investor.vanguard.com/etf/list#/etf/asset-class/month-end-returns

³ https://www.nytimes.com/interactive/2020/science/coronavirus-vaccine-tracker.html

Additional information

Funding

This work was supported by the Education University of Hong Kong [4388,4400].