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Air pollution and behavioral biases: Evidence from stock market anomalies

Hung T. Nguyen and Mia Hang Pham

Journal of Behavioral and Experimental Finance, 2021, vol. 29, issue C

Abstract: Air pollution is one of the most serious environmental risks and imposes multi-dimensional externalities. This paper examines the impact of air pollution on the efficiency of financial markets. Using a comprehensive set of market anomalies and a composite mispricing score constructed based on all anomalies, we find that stock market anomalies are stronger following severe pollution periods. We document a reduction in air pollution and anomalous returns following months when more attention has been paid toward air pollution. We also find an improvement in air quality reduces anomalous returns. Overall, the results are consistent with the hypothesis that cognitive impairment is a channel through which air pollution accelerates behavioral biases in the financial markets.

Keywords: Air pollution; Cognitive functioning; Stock market anomalies; Behavioral biases; Mispricing score (search for similar items in EconPapers)
JEL-codes: D91 G14 G41 Q53 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jbef.2020.100441

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Journal of Behavioral and Experimental Finance is currently edited by Michael Dowling and Jürgen Huber

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