Betting on Disaster: Short-Selling Activity during the COVID-19 Pandemic

The effect of COVID‐19 on the global stock market

“…9 This implies that countries with high financial risk were able to ameliorate the adverse effects of COVID‐19 on market returns. These results are consistent with other studies (Gerding et al ., 2020 ; Greppmair et al ., 2020 ). This result may be explained by the fact that countries with greater financial flexibility are more able to fund an appropriate stimulus package, which is used to offset the effects of the pandemic.…”

“…Country risk could be an important factor to explain the variation in stock markets across countries (Greer et al ., 2020 ; Greppmair et al ., 2020 ). We use country risk indices (composite risk rating index, political risk rating index, economic risk rating index, financial risk rating index, and unemployment risk rating) from Political Risk Services' International Country Risk Guide (ICRG) by the PRS Group.…”

“…In a broader sense, country risk is the degree to which political and economic unrest affect the securities of issuers doing business in a particular country. Prior research suggests that short sellers focus on less liquid companies headquartered in countries with a low credit rating (Greppmair et al ., 2020). Thus, we hypothesise:

H5: Countries with high country risk experience higher stock volatility and jumps, and lower returns during the COVID‐19 pandemic.

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“…Greppmair et al . ( 2020 ) suggest that during the COVID‐19 pandemic, short sellers have been trading on a combination of a firm's liquidity and a government's fiscal capacity. In addition, they find short‐selling activity to be focused on illiquid companies headquartered in countries with a low credit rating.…”

“…Using individual stock-level data from more than 100 countries, they find that stock market responses were less negative in countries with higher fiscal capacity (i.e., lower debt-to-GDP ratios). Greppmair et al (2020) suggest that during the COVID-19 pandemic, short sellers have been trading on a combination of a firm's liquidity and a government's fiscal capacity. In addition, they find short-selling activity to be focused on illiquid companies headquartered in countries with a low credit rating.…”