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Professor of Finance
Air Pollution; The Disposition Effect; Mutual Funds
Li J., Massa M., Zhang H., Zhang J. (2021). Air Pollution, Behavioral Bias, and the Disposition Effect in China Journal of Financial Economics, 142(2), pp. 641-673.
Inspired by the recent health science findings that air pollution affects mental health and cognition, the authors examine whether air pollution can intensify the cognitive bias observed in the financial markets.Based on a proprietary data set obtained from a large Chinese mutual fund family consisting of complete trading information for more than 773,198 accounts in 247 cities, the authors find that air pollution significantly increases investors’ disposition effects.Analysis based on two plausible exogenous variations in air quality (the vast dissipation of air pollution caused by strong winds and the Huai River policy) supports a causal interpretation. Mood regulation provides a potential mechanism.