Environmental Stressors, Mood, and Trading Decisions: Evidence from Ambient Air Pollution
58 Pages Posted: 15 Oct 2008 Last revised: 28 Oct 2013
Date Written: May 18, 2009
Drawing upon the evidence produced in medicine and psychology, we show that air-qualityinduced mood changes affect the decisions of the trading floor community and, ultimately, stock returns. We initially take advantage of a natural experiment involving the Milan Stock Exchange, and document the existence of a pollution/mood effect during the period in which trading was conducted on the floor, whereas no evidence is detected once the floor community is replaced by a computerized and decentralized trading system. Subsequently, by tracking the air pollution concentrations prevailing near the sites that host a sample of major Stock Exchanges, which act as a proxy for trader mood, we find that such measures display a systematic negative relationship with the performance of the corresponding market indices, provided the Exchange at hand employs a trading floor. The empirical regularities that we identify are inconsistent with the Efficient Market Theory, as we demonstrate that there exist some unexploited profitable trading strategies based on public air pollution data.
Keywords: Air pollution, mood effect, stock returns, behavioral finance, market efficiency
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation