1. Major idea
The main idea of the contemporary work is to describe the impact of air pollution on the investor’s behaviour which further determines the stock market return.
2. Behavioural Finance
The effect of psychology on behaviour is unavoidable in financial decision making process. As selden (1912) describes the importance of belief and attitude at the time of investing and trading activities. Consequently, Festinger et. al., (1956) introduce dynamic behavioural issue of an individuals in social psychology known as ”theory of cognitive dissonance” because the conflict of beliefs lead to set a new cognitive behaviour of the same individual. For example, the risk aversion theory by Pratt (1964) which clearly state that each individual has different risk assessment at the time of investment decision because of cognitive dissonance. Therefore each investor has different judgments about the same state of action known as ” judgmental heuristic” introduced by Tversky and Kahneman (1973). Moreover, the investor makes different option when the same problem is presented in different ways also known as framing. Therefore the rational expectation theory is failed in the presence of framing and prospect theory. Consequently, Banerjee (1992) theoretically develop a dynamic model of herd behaviour.
The objective of the behavioural finance is to investigate the irrational behaviour of investors and such absurd systemic error disturbs the real value of the stock return known as market inefficiency. The overreaction or under reaction on good or bad information leads to set the pattern of the stock market also known as a game of sentiment. However, Fama (1998) first time argue that overreaction or under reaction is a common phenomenon within same circumstances. The investors hold bad stock in their hand whereas the good stock is sold quickly because of such reactive behaviour and overconfidence. Such overconfidence lead toward excessive trade and the result is market crashed which need a market with complete information.
3. Market Efficiency
The market can be divided into three categories on the basis of information. First, weak form of market efficiency in which past information has no relation with current market return. Technical analysis is useless in the weak form of market efficiency. Second, semi strong form of market efficiency not only negates the fundamental analysis but also refuse the role of public information in the formation of the stock return. Thirdly, a strong form of market efficiency pertain all the public and private information to forecast the stock market return. Consequently, no one can get an abnormal rate of return from the trading and investing activities. So each individual has the same information package and insider trading is discouraged in that kind of market.
4. Effect of weather on decision making
The discussion shows the psychological impact on the trading and investing activities through beliefs, judgments and overconfidence. Therefore the importance of behavioural finance can be ignored in the financial decision making process particularly in stock market analysis. For example, climate has a great impact on the individual’s behaviour through mood and emotions. Thus the bad or good mood is the terminology used in the behavioural finance and it leads toward investment or not investment.
5. Influence of Air Pollution
One of the major aspects to change the mood and emotion is air quality and air pollution. In the contemporary study of China, the air quality is measured using AQI (air quality index) which consists of SO2, NO2, PM10, PM2.5, O3 and CO whereas API (air pollution index) consists of SO2, NO2 and PM10. An AQI from 0-50 and 51-100 shows an excellent and good level of air quality respectively without health implication. On the other way around, an AQI above 300 shows high air pollution level and hazardous to health. In this situation, individuals do not play an active role in the outdoor activities and reduced to go out from the home because of the health implication. Thus the influence of air pollution on individuals can be categorised into objective and subjective basis. The air pollution not only decrease the working productivity but also injurious to health in terms of objectivity. In addition, air pollution has also impact on the human psychology and mood also known as the subjective effect.
Thus air pollution decreases the labour productivity through health problem at individual level. At first level air pollution raise the illness, as a result, health spending level is increased gradually which further decrease the productivity. Accordingly, the firm performance and innovation level is also affected in the presence of high air pollution level. Therefore environmental quality has a significant impact on economic development through individual and firm level performance. As Chen et. al., (2013) clearly examines the impact of air pollution on the residents of the northern Chinese area and such pollution not only increases the mortality rate but also other health in the same area. As a result the labour efficiency and productivity has been decreased in that area. Therefore the weather condition has a significant impact on the health spending and complex health issues. As Chang, et al., (2016) also confirms the impact of air pollution on the productivity level and found the reduction of daily output about 2.5% due to increase the level of air pollution.
6. Air Pollution, Mood, Decision and Stock Market
Tamir and Yagil (2011) explore a negative impact of air pollution on the individual mood and investor’s behaviour. So a positive mood lead toward optimistic decision and vice versa.
The individual behaviour whether rational or irrational has a significant impact on the mood and decision negatively or positively. However the environmental factor shape the behaviour as discussed in the very recent study. One of the most important factors, air pollution, changes the mood (bad or good) at the time of trading and investing activities. At Last, air pollution has a negative impact on the stock return through good and bad mood.