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The Impact of Air Pollution on the Stock Market in South Korea

Author

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  • Seongcheol Paeng

    (School of Business, Shawnee State University, 940 Second Street, Portsmouth, OH 45662, USA)

  • Daniel Park

    (��Leung School of Accounting, School of Business and Management, Azusa Pacific University, 901 E Alosta Ave. Azusa, CA 91702, USA)

  • James Reneau

    (School of Business, Shawnee State University, 940 Second Street, Portsmouth, OH 45662, USA)

Abstract

Recently, researchers in behavioral finance have published numerous articles on the effects of investors’ moods on the financial market. Weather conditions and sports results change investors’ moods, affecting the financial markets. This paper examines how air pollution in South Korea, the most seriously polluted country among OECD countries, affects the stock market. We utilize the Granger Causality test to determine the significance and the Vector Auto-Regression (VAR) model, along with the Impulse Response Function (IRF), to investigate its impact over time. Furthermore, the paper employs the 2SLS method to address endogeneity problems and ensure robustness. The results show that if the level of air pollution increases by 100μg/m3, the stock return decreases by 0.41 after one day, followed by a subsequent recovery. This effect is significant at the 1% and 5% levels when using the 2SLS method. Based on the findings, we introduce an air pollution momentum strategy that maximizes cumulative return and assesses the performance of key variables.

Suggested Citation

  • Seongcheol Paeng & Daniel Park & James Reneau, 2025. "The Impact of Air Pollution on the Stock Market in South Korea," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 20(02), pages 1-29, June.
    • Handle: RePEc:wsi:afexxx:v:20:y:2025:i:02:n:s2010495225500101
    DOI: 10.1142/S2010495225500101
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