Pollution and Performance: Do Investors Make Worse Trades on Hazy Days?

Management Science, Forthcoming

48 Pages Posted: 2 Oct 2016 Last revised: 21 May 2019

See all articles by Jiekun Huang

Jiekun Huang

University of Illinois at Urbana-Champaign - Department of Finance

Nianhang Xu

Renmin University of China - School of Business

Honghai Yu

Nanjing University

Date Written: May 2, 2019

Abstract

This paper examines the relation between air pollution and individual investors' trading behavior and performance. Using unique data on stock trades by 87,054 individuals from 34 cities in China, we find a negative relation between air pollution and trade performance. This result is obtained after controlling for investor-year fixed effects, date fixed effects, as well as local weather conditions. More strikingly, abnormal trade performance decreases monotonically with the levels indicating the severity of air pollution. Furthermore, we find evidence suggesting that air pollution makes investors more susceptible to the disposition effect and attention-driven buying behavior. Overall, the results highlight a hitherto unexplored cost that ambient air pollution imposes on stock market investors.

Keywords: Air pollution, trade performance, behavioral bias, cognitive functioning, individual investors

JEL Classification: G11, G23, G14

Suggested Citation

Huang, Jiekun and Xu, Nianhang and Yu, Henry(Honghai), Pollution and Performance: Do Investors Make Worse Trades on Hazy Days? (May 2, 2019). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2846165 or http://dx.doi.org/10.2139/ssrn.2846165

Jiekun Huang (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://www.huangjk.info

Nianhang Xu

Renmin University of China - School of Business ( email )

Beijing
China

Henry(Honghai) Yu

Nanjing University ( email )

Nanjing, 210093
China

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