The Impact of the Market Maker System on CAPM Explanatory Power: Evidence from China's STAR Market

The Capital Asset Pricing Model (CAPM) identifies market risk as the key factor driving stock return variation. However, evidence from the Chinese stock market shows that its explanatory power remains limited. This study examines whether the introduction of the market-making system on the STAR Market affects the explanatory power of the CAPM. October 31, 2022, the system's implementation date, is selected as the institutional change point. The sample comprises eight semiconductor firms that were consistently included in the STAR 50 Index over the period from November 1, 2021, to October 31, 2023. Based on daily data on stock returns, market returns, and the risk-free rate obtained from the CSMAR database, this study conducts CAPM regressions using ordinary least squares (OLS). The estimated parameters are then compared across the two periods, including beta coefficients, R 2 values, and interaction term coefficients, to assess changes in asset pricing relationships after the institutional change. The results indicate that the introduction of the market maker system changed the sensitivity of stock returns to market risk on the STAR Market. However, the institutional reform does not make the CAPM, a single factor model, fully sufficient to explain return variations, suggesting that high-growth technology firms remain affected by multiple factors.