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Good air quality and stock market returns

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  • Su, Yuandong
  • Lu, Xinjie
  • Zeng, Qing
  • Huang, Dengshi

Abstract

This paper examines whether an extreme good air quality index (GAQI) is the superior predictor of stock market returns in China based on ordinary least squares method. This GAQI index is constructed based on data series from China Stock Market & Accounting Research Database. The results demonstrate that good air quality can increase stock market returns’ forecasting accuracy more than most popular variables, thereby confirming the prediction validity of the GAQI. The GAQI further exhibits superior portfolio performance when considering different risk appetites and transaction costs, thereby revealing that risk-seeking investors use GAQI information to obtain better portfolio performance over risk-averse investors. The findings offer new insights for stock market returns’ prediction based on air quality on the condition that air quality is undeniably a sharp focus in society.

Suggested Citation

  • Su, Yuandong & Lu, Xinjie & Zeng, Qing & Huang, Dengshi, 2022. "Good air quality and stock market returns," Research in International Business and Finance, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:riibaf:v:62:y:2022:i:c:s0275531922001118
    DOI: 10.1016/j.ribaf.2022.101723
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    More about this item

    Keywords

    Extreme air quality; Stock returns; Macroeconomic variables; Risk appetites; Trading cost;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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