Particles, Pollutions and Prices
59 Pages Posted: 17 Nov 2014
Date Written: May 1, 2014
We investigate whether a sentiment effect arising from poor air quality impacts stock prices. We find little evidence suggesting that local air quality directly affects stock prices. However, we show that the local air quality index (which is increasing in air pollution) relative to that of Beijing negatively affects stock prices. We apply a discontinuity design that focuses on observations with relative air quality index falling in the narrow band around zero and find a consistent result. Additional analysis uncovers a small subsequent reversal in returns in response to the relative air quality. Further, we find that the relative air quality is also negatively associated with trading volume. Finally, we show that the negative association between air quality index and stock prices is not affected by economic fundamentals. In sum, our findings suggest that poor air quality negatively affects stock prices and investor trading behavior.
Keywords: China, Pollution, Stock return, Behavioral bias
JEL Classification: A12, G21, N55
Suggested Citation: Suggested Citation