PM2.5 Pollution, Retail Trading, and Stock Market Returns

PM2.5 is a dangerous airborne pollutant. Its induced health and economic losses affect investors and stock markets worldwide. This study applies mediation analyses to examine the relationship of Bangkok’s PM2.5 pollution with Thai stock market returns, where retail trading serves as a mediator. Investors are unaware of the actual PM2.5 level, therefore, the PM2.5 level is a perceived level, not an actual level. Perception is measured by Google’s relative search volume index on “PM 2.5”. It is decomposed into correct perception (actual PM2.5 level) and misperception (regression residual of the full perception on the correct perception). Using a daily sample from August 1, 2016, to December 28, 2023, the generalized method of moments regression uncovered a negative and significant relationship. The main contributor was found to be the mediating effect of retail net buying volume induced by misperception. Further investigation suggests that this relationship is consistent with the noise-trader-risk explanation.