Is Air-Quality a Risk Factor that Affects Stock Returns?

53 Pages Posted: 16 Jan 2018

See all articles by Bo Liu

Bo Liu

Zhejiang University - School of Management

Yexiao Xu

University of Texas at Dallas - School of Management

Date Written: January 16, 2017

Abstract

Different from prior research that studies weather related factors on equity returns from a behavioral perspective, we investigate air quality on stock returns from a risk perspective using Chinese data. When air-quality risk increases, it not only depresses economic activities of firms but also alters investors’ preference for their stocks as well. In response to the increased pollution risk, current stock price will drop, but future return will increase. Using a unique measure of aggregate air quality change, we estimate air-quality risk for individual firms, and are able to explain future return differences with these beta estimate from a cross-sectional perspective. Moreover, we show that the cross-sectional differences in the pollution beta are related to firms’ future profit margins, investment, and per capita output. In addition, we present a natural experiment suggesting that the air-quality is an independent risk factor.

Keywords: AQI, Air Quality Beta, CSR, Pollution Risk, Cross-Sectional Returns

Suggested Citation

Liu, Bo and Xu, Yexiao, Is Air-Quality a Risk Factor that Affects Stock Returns? (January 16, 2017). Available at SSRN: https://ssrn.com/abstract=3103043 or http://dx.doi.org/10.2139/ssrn.3103043

Bo Liu

Zhejiang University - School of Management ( email )

Hangzhou, Zhejiang Province 310058
China

Yexiao Xu (Contact Author)

University of Texas at Dallas - School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
972-883-6703 (Phone)

HOME PAGE: http://www.utdallas.edu/~yexiaoxu

Register to save articles to
your library

Register

Paper statistics

Downloads
66
Abstract Views
310
rank
338,394
PlumX Metrics