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

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.

Automated summary

This paper examines the impact of Covid-19 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. The study finds that the rising unanticipated severity of Covid-19 significantly reduces the alphas and betas of mid-cap and small-cap ETFs, but has no significant effect on large-cap and sector & speciality ETFs. Therefore, retail investors should avoid market timing or panic selling, especially with the potential development of successful vaccinations in the near future.