Good air quality and stock market returns

Abstract

This paper examines whether an extreme good air quality index (GAQI) is the superior predictor of stock market returns in China based on ordinary least squares method. This GAQI index is constructed based on data series from China Stock Market & Accounting Research Database. The results demonstrate that good air quality can increase stock market returns’ forecasting accuracy more than most popular variables, thereby confirming the prediction validity of the GAQI. The GAQI further exhibits superior portfolio performance when considering different risk appetites and transaction costs, thereby revealing that risk-seeking investors use GAQI information to obtain better portfolio performance over risk-averse investors. The findings offer new insights for stock market returns’ prediction based on air quality on the condition that air quality is undeniably a sharp focus in society.