Air Pollution, Behavioral Bias, and the Disposition Effect in China
78 Pages Posted: 28 Jun 2017 Last revised: 14 Oct 2019
Date Written: October 11, 2019
Inspired by the recent health science findings that air pollution affects mental health and cognition, we examine whether air pollution can intensify the cognitive bias observed in the financial markets. Based on a proprietary data set obtained from a large Chinese mutual fund family consisting of complete trading information for more than 773,198 accounts in 247 cities, we find that air pollution significantly increases investors’ disposition effects. Analysis based on two plausible exogenous variations in air quality (the vast dissipation of air pollution caused by strong winds and the Huai River policy) supports a causal interpretation. Mood regulation provides a potential mechanism.
Keywords: Air Pollution, The Disposition Effect, Mutual Funds
JEL Classification: G02, G10, Q5
Suggested Citation: Suggested Citation