CAPM and Covid-19: Evidence from Eastern European Stock Markets

COVID-19 have introduced a new level of uncertainty into countries’ economies and financial markets. A new disease was first discovered in Wuhan, China in late 2019 and on March 11th, 2020 was identified as a “global pandemic” by the World Health Organization. More than 90 countries have introduced lockdowns immediately which have led to severe economic and social consequences. On March 15th 2020 financial markets collapsed, Dow Jones Industrial Average fell by 35%, S&P Index have lost 32% and NASDAQ Composite Index droped by 29%. This is the largest stock market crash since the financial crisis 2007- 2008. Nevertheless, though the markets recovered quickly, not all industries managed to adapt to new reality. A lot of companies from retail, hospitality, avia, and other industries, which are greatly dependent on human physical interaction have gone bankrupt. Meanwhile, others – e.g. telecomunication, gaming, delivery services and pharmaceuticals succesfully adapted to new social distancing norms and overperformed the market. Once safe companies for investments have now become risky and volatile, and vice versa. An investor considering which stock to purchase should take into account how sucessful the company is dealing with the pandemic outbreak restrictions and its consequences. Capital Asset Pricing Model (CAPM) is widely used to measure the expected return on paticular asset. It describes the relationship between the expected retun on the security and the risk associated with it. This model accounts for systematic risk and suggests the compensation to investor in the form of the risk premium. However, such an unexpected phenomenon as COVID-19 outbreak cannot be associated with systematic risk, as nobody unticipated the upcoming crisis and nobody was ready to face it.