Theoretical and Applied Economics
No. 2 / 2021 (627), Summer
COVID-19 and CAPM: a tale of reference dependence with the pharma stocks’ returns
Rabindra Mahavidyalaya, India
Pooja AGARWAL
Burdwan University, India
Abstract. Given the sustained attention to COVID-19, we explore if a reference dependent version of the CAPM has a good explanatory power. It views the CAPM with the prospect theory references - certainty effect, reflection effect and isolation effect. It firstly follows a linear prospect theory version of the CAPM, then, it extends that with the autoregressive distributed lag (ARDL) model, and finally, it augments them in the generalized autoregressive conditional heteroskedastic (GARCH-X) setup. It views the risk-free rate and market rate of returns as the certainty effect and reflection effect respectively while the lagged endogenous returns and the ARCH and GARCH effects as the isolation effects. With the NSE listed pharma-stocks’ data during COVID-19, pre- COVID-19 and both periods together, the prospect theory references depict that investors can build up different implications of the CAPM. With certainty effect, the prospect theory version of CAPM has less explanatory power while with reflection effect, the same has good explanatory power with the sample stocks over the data sets but it does not explain the isolation effects at all. Investors may re-look into that the CAPM if calibrated with the prospect theory references at ARDL and GARCHX augmentations, it provides better explanatory powers.
Contents
The impact of non-banking financial markets on economic development
The effect of financial liberalization on Malaysian economic growth
Causal relationship between agricultural exports and economic growth: a diagnostic approach
COVID-19 and CAPM: a tale of reference dependence with the pharma stocks’ returns
Statistical analysis on population ageing
An impulse response function analysis of the impact of modern payment technologies on money demand in Nigeria
Statistical analysis on the evolution of economic activity in Romania
Determinants of trade flows to Agadir Agreement countries: gravity model three-way approach
Case study: The impact on the Romanian State Budget in the case of EU adoption of the CCCTB Directive
Public expenditure and economic development: New evidence from the BRICS-SAARC-ASEAN region
The external debt burden and economic growth in Africa: a panel data analysis
What explains the real exchange rate movement for the BRICS nations? With a separate analysis for Indian economy
Export supporting strategy, distance to frontier and economic growth
Volatility Forecasting, Market Efficiency and Effect of Recession of SRI Indices
The impact of taxation on growth: the case of Greece