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

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.