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

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 100[Formula: see text]g/m 3 , 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.