Short-Selling and Behavioral Bias in Korean Stock Market

This study investigates whether or not the short-selling behavioral bias of investors exists in the Korean stock market. We analyze how the weather bias related to climate factors affects short-selling traders, commonly known as informed traders. To do this we estimated the dynamic panel model using daily data and examined the relationship between market variables such as stock returns, short sale volume, non-short sale volume, total trading volume, and weather variables consisting of cloud cover and sunshine hours. This study shows that not only returns but also short selling volumes are all affected by weather factors. In the case of stock returns, both cloud cover and sunshine hours have a statistically significant impact on returns, and its sign is estimated to be inversely proportional to both factors. That is, we find that returns decrease on cloud days, but increase on sunny days. In terms of the trading behavior of the market participants, it is interesting to note that the trading volume decreases when the weather is blunted, But did not show any statistical significances. On the other hand, both the original and the seasonally adjusted weather factors of cloud cover have a statistically significant positive effect on the short-sale volume. This means that as the weather worsens, short-selling traders submit more orders, indicating the presence of behavioral bias.