One study earlier this year found that more than 80 per cent of Chinese are regularly exposed to pollution levels deemed unhealthy by the US Environmental Protection Agency, with air pollution killing about 4, people a day or accounting for about 17 per cent of all deaths in China.

This surge of pollutants not only has a direct impact on health but its burden on the economy and business is becoming increasingly apparent. Bad moods make people more pessimistic and research has shown that pessimism causes people to reduce the value they place on things. Several studies have examined the effect of weather and other environmental factors on trading behavior.

We found that while the actual local air pollution has little direct influence on stock prices, what matters is how severe the perception is perceived to be.

More precisely, we found that when local air quality is perceived by investors to be worse relative to air quality in Beijing, there is a noticeable and significant negative impact on stock prices. Furthermore, this perception of relative air quality also negatively affects trading volume.

Out study examined daily pollution data from cities across China as well as stock market data from to As a result many investors use it as a natural reference point to define the relative air quality of the city they are in.

The psychological theory known as social comparison suggests that people form sentiments or moods when they compare their personal status with that of other people while evaluating their own status or welfare.

Exxon released 10 million pounds of air pollution in Texas - Apr. 27,

This shapes their perceptions of value and, as a result, their behavior and decisions. Given that, we then looked to see whether this effect was less pronounced among institutional investors, since they are generally thought to be more sophisticated and hence, less affected by factors such as air pollution. Our results showed that institutional investors are also affected by their perception of relative air quality when making investment and trading decisions.

Does Air Pollution Bring Down the Stock Market?

Another consideration was whether it was an economic slowdown caused by the impact of pollution on business operations rather than poor sentiment on the part of investors that brought stock prices down. However our study found that the mood arising from perception of relative air quality affects stock prices well beyond that accounted for by economic fundamentals — hence sentiment caused by pollution plays a significant part in stock prices.

This perception of relative AQI also influences trading volume.

Air pollution drives down the stock market - Journalist's Resource

Similar to past studies which found that trading volume goes down when there is extreme weather, investors trade less when they think their local city is more polluted than Beijing and vice versa. Oliver Zhen Li is professor of Accounting and director of the China Business Centre at NUS Business School. Subscribe Media Partners Contact. Sign up to our newsletter.

The Possible Link Between Air Pollution And The Stock Market - ydelery.web.fc2.com

Pollution and stock prices: A matter of perception. By Oliver Zhen Li November 3rd, Green Business Finance. Author Profile Oliver Zhen Li is professor of Accounting and director of the China Business Centre at NUS Business School.

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