The Effect of Air Pollution on Investor Behavior: Evidence from the S&P 500

46 Pages Posted: 24 Oct 2016

See all articles by Anthony G. Heyes

Anthony G. Heyes

University of London, Royal Holloway College - Department of Economics

Matthew Neidell

Columbia University; University of Chicago - Department of Economics and CISES; PERC - Property and Environment Research Center

Soodeh Saberian

University of Ottawa - Department of Economics

Date Written: October 2016

Abstract

We provide detailed empirical evidence of a direct effect of air pollution on the efficient operation of the New York Stock Exchange, linking short-term variations in fine particulate matter (PM2.5) in Manhattan to movements in the S&P 500. The effects are substantial – a one standard deviation increases in ambient PM2.5 reduces same-day returns by 11.9% in our preferred specification – and remarkably robust to a variety of specifications and a battery of robustness and falsification checks. Furthermore, the intra-day effects that we observe are difficult to reconcile with competing hypotheses. Despite investors being dispersed geographically we find strong evidence that the effect is strictly local in nature, consistent with the high concentration of market influencers in New York. While we are agnostic as to the underlying mechanism, we provide evidence suggestive of the role of decreased risk tolerance operating through pollution-induced changes in mood or cognitive function.

Suggested Citation

Heyes, Anthony and Neidell, Matthew and Saberian, Soodeh, The Effect of Air Pollution on Investor Behavior: Evidence from the S&P 500 (October 2016). NBER Working Paper No. w22753. Available at SSRN: https://ssrn.com/abstract=2858063

Anthony Heyes (Contact Author)

University of London, Royal Holloway College - Department of Economics ( email )

Royal Holloway College
Egham
Surrey, Surrey TW20 0EX
United Kingdom
44-(0)1784 44-3907 (Phone)
44-(0)1784 43-9534 (Fax)

Matthew Neidell

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

University of Chicago - Department of Economics and CISES ( email )

1126 East 59th Street
Chicago, IL 60637
United States

PERC - Property and Environment Research Center

2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

Soodeh Saberian

University of Ottawa - Department of Economics

Social Sciences Building Room 9005
Ottawa, Ontario K1N 6N5
Canada

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