A cloudy day in the market: short selling behavioural bias or trading strategy

Purpose - Research draws the distinction between noise traders and informed traders. Research also documents market biases in equity returns due to cloud cover, a non-informational (noise) event, showing that returns decrease on cloudy days. The purpose of this paper is to investigate the trading behaviour of short-sellers, who are considered informed traders, conditioning on the level of cloudiness, and find an increase in short selling with the level of cloudiness. Additionally, the paper finds decreases in short selling the three days prior to a cloudy day (or series of cloudy days). Design/methodology/approach - The authors replicate the weather anomaly in stock returns reported in the literature for the sample period, and then study the trading behaviour of short sellers conditioned on cloud cover. Additionally the authors treat cloud cover as an event and study short selling volume in the pre-event window. Findings - The paper finds an increase in short selling with the level of cloudiness. Additionally, the paper finds decreases in short selling, relative to the event day(s), in the three days prior to a cloudy day (or series of cloudy days). Originality/value - The authors believe that they are the first to document that weather impacts short seller's trading behaviour. The authors argue that the results point towards a behavioural bias.