Particles, Pollutions and Prices

59 Pages Posted: 17 Nov 2014

See all articles by Xiaoli Hu

Xiaoli Hu

National University of Singapore

Oliver Zhen Li

National University of Singapore (NUS)

Yupeng Lin

National University of Singapore

Date Written: May 1, 2014

Abstract

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

Hu, Xiaoli and Li, Oliver Zhen and Lin, Yupeng, Particles, Pollutions and Prices (May 1, 2014). Available at SSRN: https://ssrn.com/abstract=2525980 or http://dx.doi.org/10.2139/ssrn.2525980

Xiaoli Hu

National University of Singapore ( email )

1 Business Link
Singapore, 117592
Singapore
90811915 (Phone)
90811915 (Fax)

Oliver Zhen Li (Contact Author)

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Yupeng Lin

National University of Singapore ( email )

15 Kent ridge drive
Singapore
Singapore

HOME PAGE: http://sites.google.com/site/scottlinyupeng/

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