The Impact of Air Pollution on the Stock Market in South Korea
Recently, behavioral finance researchers have produced many articles about moods effect on financial market. Weather factors and sports sentiments have a significant impact on moods and then the moods affect financial market. Air pollution also has an effect on financial market. This paper's hypothesis is that air pollution has a meaningful negative impact on the stock market in South Korea. This paper uses the Granger Causality for checking the significances and the Vector Auto-Regression model and the Impulse Response Function for investigating its impact according to time. Furthermore, this paper uses the 2SLS method for resolving endogeneity problems and checking robustness. If the level of air pollution increases 100 ??/?3, then the stock return reduces 0.42 after one day, and then recovers. The effect is significant at the 1% level and similar with the 2SLS method. Finally, this paper introduces air pollution momentum strategy that maximizes the cumulative return and measures the key variable's performance.
2SLS, Air Pollution, Granger Causality, Impulse Response Function, Stock Market, Vector Auto-Regression
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