The Stock Market Effect of Air Pollution: Evidence from Finland and Hong Kong

Abstract

Environmental stimuli have been found to affect people’s moods, and through that, their risk aversion. Recent studies in the field of behavioral finance have documented an inverse relationship with one such stimulus – air pollution – and the corresponding domestic stock market returns. In this study, I investigate the existence of such “pollution effect” in the unique cities of Helsinki and Hong Kong. Using the particulate matter measurements from 2000 to 2016 as a proxy, I study the returns of various market and sector indices in relation to air pollution levels. The findings from numerous empirical tests show that an unhealthy air quality level in Helsinki negatively affects the following day’s stock returns, especially for the Oil & Gas sector. The results suggest that air pollution is a behavioral factor with some connection to stock returns in Finland.