Can Asset Pricing Theory Explain the U.S. Stock Market Returns During the COVID-19 Pandemic?

Abstract

The COVID-19 pandemic imposed high uncertainty to stock markets and prompted an unprecedented market reaction. This thesis investigates the suitability of asset pricing theory for explaining asset prices on U.S. stock markets during the COVID-19 pandemic. We focus on the renowned asset pricing models of Fama and French in addition to the Capital Asset Pricing Model. The asset pricing models are primarily tested on industry portfolios comparing a control period (1st January 2015 – 19th January 2020) and a COVID-19 pandemic period (19th January 2020 – 30th April 2021). We use the Generalized Method of Moments approach in our regressions. Our results provide evidence that the tested asset pricing models perform well during the pandemic, in fact, even better than in the relatively stable control period.