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Air pollution, behavioral bias, and the disposition effect in China

Author

Listed:
  • Li, Jennifer (Jie)
  • Massa, Massimo
  • Zhang, Hong
  • Zhang, Jian

Abstract

Inspired by the recent health science findings that air pollution affects mental health and cognition, we examine whether air pollution can intensify the cognitive bias observed in the financial markets. Based on a proprietary data set obtained from a large Chinese mutual fund family consisting of complete trading information for more than 773,198 accounts in 247 cities, we find that air pollution significantly increases investors’ disposition effects. Analysis based on two plausible exogenous variations in air quality (the vast dissipation of air pollution caused by strong winds and the Huai River policy) supports a causal interpretation. Mood regulation provides a potential mechanism.

Suggested Citation

  • Li, Jennifer (Jie) & Massa, Massimo & Zhang, Hong & Zhang, Jian, 2021. "Air pollution, behavioral bias, and the disposition effect in China," Journal of Financial Economics, Elsevier, vol. 142(2), pages 641-673.
    • Handle: RePEc:eee:jfinec:v:142:y:2021:i:2:p:641-673
    DOI: 10.1016/j.jfineco.2019.09.003
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    More about this item

    Keywords

    Air pollution; The disposition effect; Mutual funds;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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