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

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