Thursday, December 22, 2016

Does Air Pollution Affect the Stock Market?

The main trading room of the Tokyo Stock Excha...
The Effect of Air Pollution on Investor Behavior: Evidence from the S&P 500 (Abstract, Anthony Heyes, Matthew Neidell, Soodeh Saberian, National Bureau of Economic Research, Oct. 26, 2016)

Also discussed here: Why investors may want to keep tabs on air pollution (CBS News, Oct. 26, 2016) 

 Today we review several reports that look at the links, if any, between investment returns and short term changes in local air quality, as examined in the stock exchanges of the USA, Italy and China. There is some evidence that higher levels of fine particulate matter may reduce one day returns by almost 12%. Also, when the trading floor is near or within an area of higher air pollution, trading activity is affected.

Key Quotes:

“We hypothesize that pollution decreases the risk attitudes of investors via short-term changes in brain and/or physical health,”

“Unlike other common air pollutants -- which either remain outside or break down very rapidly once indoors -- going inside reduces one’s exposure to [fine particulate matter] only minimally…a one standard deviation increases in ambient PM2.5 reduces same-day returns by 11.9%”

“We find {USA] that air pollution is negatively related to stock returns, even when controlling for other variables. The relationship becomes weaker as the distance of the stock exchange from the polluted area increases.”

“we document the existence of an air pollution effect only when trading is conducted on the floor, which provides evidence in support of the view that the air pollution effect is at least partly mediated by the behavior of the trading floor community.”

“Our results [China] indicate that asset returns are unaffected by changes in mood introduced by factors including the weather and the onset and recovery from SAD… we show that in an order-driven market, environmental impacts on sentiment are likely to affect trading activities, but not returns.”

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