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Dispatches

Pollution Hurts Stock Returns

A study in New York City found that as pollution levels rise, investors become more risk-averse, which leads to worse returns for stock prices.

Higher pollution leads to worse returns for stock prices. Specifically, an unusual (meaning greater than one standard deviation) increase in fine particulate matter (PM2.5) leads to an 11.9% reduction in the performance of the S&P 500 index. To be clear, this is not an 11.9% drop, but an 11.9% decline in relative returns.

As pollution levels rise, investors become more risk-averse. Investors also exhibit signs of choice bracketing, meaning they are more likely to make choices individually rather than as a group. The latter effect manifests itself as traders show less preference for complex choices and more preference for simpler choices with lower returns.

This finding is based on a study of pollution levels in New York City, specifically Manhattan, over the period of 2000 through 2014. The area was chosen due to concentration of investors, market-makers and professionals with the discretionary ability to influence investment decisions working in and around Wall Street. PM2.5 was looked at because the diminutive size of such particles allows them to circulate indoors in areas such as the New York Stock Exchange as well as travel through a person’s respiratory and circulatory systems.

The effect of pollution on the S&P 500’s returns is specific to Manhattan. Pollution levels in other locales were not found to be associated with the stock market’s performance. This is not surprising, given that New York is the largest financial center in the United States.

Previous studies have found that weather impacts stock market returns. For example, absolute levels of light and how those levels differ from those of the two previous days alter risk tolerance, as discussed in the Briefly Noted section of the July 2015 AAII Journal (“Sunshine Impacts Tolerances for Risk and Uncertainty”). The impact of pollution is separate from that of weather, however.

Pollution’s impact on stock market returns is temporary, with a rebound in the S&P 500 occurring in as little as one trading day. Not discussed by the study’s authors is whether there is any link between the historically weaker returns of the stock market during the summer months and the typically higher levels of pollution occurring during the same time period.

“The Effect of Air Pollution on Investor Behavior: Evidence From the S&P 500,” Anthony Heyes, Matthew Neidell and Soodeh Saberian, National Bureau of Economic Research Working Paper 22753, October 2016.

Discussion

Park Chamberlain from CA posted over 9 years ago:

Correlation is not causation. I'll wait until this result is confirmed by an independent study before taking it seriously.


Daniel Cullen from MI posted over 9 years ago:

I don't understand the "11.9% decline in relative returns." What does this mean? Thanks


Sam Shelton from GA posted over 9 years ago:

The literal interpretation is that if stock returns are 10% with low particulates, increasing particulates by 1 standard deviation will reduce the 10% return by 0.119 x 10% = 1.19% leading to a stock return of 10% - 1.19% = 8.81%. The question is what is the standard deviation value.


Lester Marshall from TX posted over 9 years ago:

LOL. This looks bogus to me. Is it the result of data mining? Like the Alar (an insecticide) on apples causes cancer scare. Turned out the people doing the study were throwing out all the data that didn't give them the results they wanted.


Theodor Nicolau from NJ posted over 9 years ago:

Is this another study financed with taxmoney by the government?


Donald Faulk from LA posted over 9 years ago:

this is a lot of bull. I think my toilet overflowing three years ago caused the reduction in returns on the S&P.


Arthur Heller from CO posted over 9 years ago:

Publication of an article such as this simply lowers my respect for AAII


Christopher Viscomi from VT posted over 9 years ago:

These types of studies are at best an "association" of two events, which may be causative or may be coincidence. If there is a causal relationship, there is also no way of knowing which of the two variables: do poor stock returns cause companies to pollute more, or vice versa. AAII should vet these types of articles more carefully, and certainly the newsletter article title should be more accurate: "Study suggests high air pollution rates may be associated with low stock market returns."


John Izydorczyk from FL posted over 9 years ago:

After a quick read of this article, the only thing I see that may have a negative impact on the S&P 500 is the time wasted by the author and the time lost by myself and everyone who read it. Environmentalists who waste time on such extreme fringes are similar to those caught up in religious cults. They are brainwashed and blinded to reality.


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