Air Pollution, Stock Return, and Volatility: Evidence from Korean Stock Markets

Abstract

This study analyzes the direct and indirect effects of air pollution on the return and volatility of the KOSPI index through the trading ratio by investor type. The main results are as follows. First, air pollutants have a direct effect on volatility; coarse particulate matter (PM10) and fine particulate matter (PM2.5) have a negative effect on volatility. Second, air pollutants have a significant effect on the trading ratio by investor type; as the concentration of fine particulate matter (PM2.5) increases, the trading ratio of institutionals and those of foreigners decrease. Third, the effect of cumulative exposure of air pollutants on stock return and volatility is greater than that of daily exposure. Although there is no effect on daily exposure to air pollution, stock return decreases during cumulative exposure to fine particu-late matter (PM2.5), nitrogen dioxide (NO2), and carbon monoxide (CO). The volatility changes significantly with cumulative exposure compared to daily exposure to coarse particulate matter (PM10), fine particulate matter (PM2.5), ozone (O3), nitrogen dioxide (NO2) and sulfur dioxide (SO2). Fourth, air pollutants have an indirect effect on stock return and volatility through trading ratio by institutional and foreign investors. In particular, the effect of air pollution through the foreign investors’ trading ratio is a remarkable result revealed in this study.