Margin purchases, short sales and stock return volatility in China: Evidence from the COVID-19 outbreak

In this paper, we investigate the effects of margin purchases and short sales on the return volatility in the Chinese stock market during the COVID-19 outbreak. We present two main findings. First, we show that stocks with higher level of margin-trading activity exhibit higher return volatility. The COVID-19 outbreak amplifies the destabilizing effects of margin-trading activity. Second, no evidence shows that short selling destabilizes the stock market in general. However, we observe that intensified short-selling activity is associated with lower return volatility when infection risk is high during the COVID-19 crisis.