The Impact of COVID-19 Pandemic on the Effectiveness of the CAPM Model: Evidence from the Chinese Market and Pharmaceutical Industry

After years of development, the Capital Asset Pricing Model (CAPM) has been widely used in financial and economic fields. However, there is great controversy about whether this model is effective in the Chinese market. To examine it, the paper uses data from 185 stocks in the pharmaceutical industry and 1,130 stocks in the Shanghai Stock Exchange A-share. Then calculates the returns of these stocks and uses the BJS time-series method for two periods, one from 1 January 2017 to 31 December 2019, and the other from 1 January 2020 to 31 December 2022, performing three-stage regressions respectively. Ultimately, the paper finds empirically that the pharmaceutical industry and the market have a positive but non-significant linear relationship between expected stock returns and systematic risk before Covid-19 and a negative but still non-significant linear relationship between expected stock returns and systematic risk after the pandemic. In this paper, we investigate the effectiveness of the model in the pharmaceutical industry and the market before and after the pandemic, which can further promote the research on its effectiveness in the Chinese stock market.