Air pollution and household stock market participation

Abstract

We investigate whether air pollution affects household stock market participation. Using representative household survey data in China, we find that households significantly reduce their financial risk taking when exposed to heavy air pollution. This finding is robust to an instrumental variable analysis and a regression discontinuity test based on the Huai River policy. To explore the underlying mechanisms, we find that air pollution significantly impairs health, increases unemployment risk, impedes cognitive performance, and dampens mood. We further show that these channels explain a non-trivial proportion of the relationship between air pollution and stock market participation. Our study sheds light on the far-reaching influence of air pollution on households’ well-being from the perspective of portfolio choice.