Be Nice to the Air: Severe Haze Pollution and Mutual Fund Risk
Posted: 26 Sep 2022 Last revised: 9 Dec 2022
Date Written: September 7, 2022
Abstract
Air pollution is one of the greatest environmental risks and affects various aspects of life. Motivated by the increasing roles of mutual funds in financial markets in recent decades, this study examines the impact of ambient pollution on mutual fund risk in China where pollution is among the most serious environmental concerns. Using propriety data manually collected from various datasets, we find that polluted air increases mutual funds’ tracking errors. The findings are robust after accounting for fund attributes, manager characteristics, and market environment variations. The adoption of different identification strategies, including instrumental variable estimations and difference-in-difference analyses based on two natural experiments, suggests the impact of air pollution on mutual funds’ tracking errors is causal.
Keywords: Air Pollution, Mutual Funds, Cognitive Biases, Health Concerns, Natural Experiments, Difference-in-Difference.
JEL Classification: Q5, G20, G23, G41
Suggested Citation: Suggested Citation