17038887[1]

A cloudy day in the market: short selling behavioural bias or trading strategy Ethan Watson University of Mississippi, Oxford, Mississippi, USA, and Mary C. Funck Sam Houston State University, Huntsville, Texas, USA Abstract Purpose – Research draws the distinction between no ise 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 shor t-sell ers , who are consid ere d inf ormed tra der s, con dit ioni ng 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 liter ature for the sample period , and then study the tradin g beha viour of short seller s 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. Keywords Weather anomaly, Short selling, Trade, Clouds, Financial markets Paper type Research paper 1. Intr oduct ion Blaise Pascal, a French mathematician and inventor, stated, “The weather and my mood have little connection. I have my foggy and fine days within me; my prosperity or misfortune has little to do with the matter (The_weather_and_my_mood_have_ little_connection, n.d.).” Contrary to the assertions of Pascal, research spanning several disciplines demonstrates a link between weather, human mood, and behavior. For instance, the medical literature details how sunlight can be used to treat depression and reduce the need for post-operative analgesics (Eagles, 1994; Walch et al., 2005; Benedetti et al., 2001; Tietjen and Kripke, 1994). Research in the psychology domain est ablis hes how pre cipita tion, hours of sunshi ne, and tempera ture inf lue nce self-reported mood, optimism levels, performance, and behavior (Cunningham, 1979; Howarth and Hoffman, 1984; Parsons, 2001; Rind and Strohmetz, 2001; Pilcher et al., 2002). In addition, this stream of literature describes how mood affects behavior. For example, Isen (2001) finds that a positive affect enhances problem-solving capabilities, Bless et al. (1996) demonstrate that mood affects the way in which individuals process The current issue and full text archive of this journal is available at www.emeraldinsight.com/1743-9132.htm International Journal of Managerial Finance Vol. 8 No. 3, 2012 pp. 238-255 r Emerald Group Publishing Limited 1743-9132 DOI 10.1108/17439131211238888 The authors would like to thank Dr Robert and Bonnie Van Ness, Andriy Shkilko (special edition Edi tor) , and two anonymou s rev iewers for the ir hel pfu l commen ts. The aut hors remain responsible for any errors herein. 238 IJMF 8,3

17038887[1]

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