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

Li, Jennifer (Jie), Massimo Massa, Hong Zhang and Jian Zhang

Journal of Financial Economics, 2021, vol. 142, issue 2, 641-673

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.

Keywords: Air pollution; The disposition effect; Mutual funds (search for similar items in EconPapers)
JEL-codes: G02 G10 Q5 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (44)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:142:y:2021:i:2:p:641-673

DOI: 10.1016/j.jfineco.2019.09.003

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