Journal
INTERNATIONAL REVIEW OF ECONOMICS & FINANCE
Volume 67, Issue -, Pages 267-287Publisher
ELSEVIER
DOI: 10.1016/j.iref.2020.02.001
Keywords
Air pollution; Asset pricing; Individual investors; Investor mood
Categories
Funding
- National Natural Science Foundation of China [71973018]
- Fundamental Research Funds for the Central Universities [2018CDJSK02PT10]
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We construct a firm-level index for measuring the mood of individual investors induced by air pollution in the Chinese stock market. In a setting where individual investors dominate the stock market, we examine how the individual investor mood affects stock pricing. We find that the investor mood only affects individual investors' trading behaviors, thereby validating the individual investor mood indices. Further, a pessimistic individual investor mood decreases liquidity and volatility, eventually causing a decline in stock returns. The mispricing caused by the individual investor mood cannot be eliminated by using risk-factor models, thereby implying the limited efficiency of the Chinese stock market.
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