A Critical Evaluation of the Asymmetric Effects of Covid-19 on the Risk Betas of Essential and Non-Essential Sectors

Abstract

Abstract The main aim of this research study is to critically evaluate the impact of the current health crisis on the betas (a measure of systematic risk) of companies listed on the London Stock Exchange in the United Kingdom. Specifically, the current study focuses on examining the underlying impact of the covid19 health crisis on the betas of companies grouped under two different categories including the non-essential services category and the essential services category. The current study also seeks to compare the impact of the current health crisis on the betas of non-essential and essential companies with the impact that the 2008 financial crisis had on the same companies. The current study relies on secondary research that deploys an event study approach in order to achieve the aim of the research study herein. Historical data on weekly adjusted closing prices of 26 stocks grouped equally under two categories (non-essential companies and essential companies) based on government guidelines, was collected and used to calculate the betas for four different periods including the period before covid19, during covid19, before the 2008 financial crisis and during the 2008 financial crisis. The FTSE All-Share Index was used as the market benchmark for purposes of calculating beta. The comparison of the results obtained from the data collected and the analysis conducted indicates that covid19 had a more profound impact on stock price returns and betas of the selected companies for this study compared to the impact that the 2008 financial crisis had on the same companies. In addition, the results indicate that the covid19 pandemic had a more significant impact on the betas of non-essential companies compared to essential companies. There are various explanations that have been presented in prior studies to explain the reasons for the profound impact of the covid19 pandemic. However, this study finds that the response actions and policies implemented by the government during covid19 provide the most compelling and satisfying explanation for the unprecedented covid19 impact on the stock market – both on the volatility (measured by beta) and stock market returns.