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Oil information uncertainty and aggregate market returns: A natural experiment based on satellite data

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  • Hao, Xianfeng
  • Wang, Yudong
  • Wu, Chongfeng
  • Wu, Liangyu

Abstract

Satellites can “see” oil inventory in oil tanks, but they are sensitive to cloud cover. Cloud cover introduces a new uncertainty related to information quality. We measure such information uncertainty by assessing cloud cover over floating roof oil tanks. Using a cloud cover index, we demonstrate that higher information uncertainty leads to lower future returns (mean effect) and a stronger momentum anomaly (interaction effect). These two effects can be explained by investor overconfidence and arbitrage costs, respectively. An investor with a mean–variance preference obtains sizable gains in terms of certainty equivalent return, which accounts for the mean effect.

Suggested Citation

  • Hao, Xianfeng & Wang, Yudong & Wu, Chongfeng & Wu, Liangyu, 2024. "Oil information uncertainty and aggregate market returns: A natural experiment based on satellite data," Journal of Financial Markets, Elsevier, vol. 70(C).
    • Handle: RePEc:eee:finmar:v:70:y:2024:i:c:s1386418124000314
    DOI: 10.1016/j.finmar.2024.100913
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    Keywords

    Alternative data; Satellite information uncertainty; Cloud cover; Excess returns;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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