Abstract
Background/objectives: This study attempts to examine a systematic relationship between air quality index (AQI) and the performance of stock markets in India. India has ranked among the bottom five countries in environmental performance index (EPI) by World Economic Forum (WEF). Previous studies in this field conducted in other parts of the world indicate a direct relation between environmental performance and market performance; however, the case of India may prove to be different considering the Indian environmental policy, environmental accountability, population, and income and development aspects. Methods: We have employed linear regression technique to ascertain the impact of AQI on stock returns. AQI data from 13 stations across India are the dependent variables. These dependent variables are each regressed individually for each stock market index from Bombay Stock Exchange (BSE) equity index, Sensex. Therefore, there are 17 models where AQI from the chosen 13 stations has been regressed with each of the industry specific index. A descriptive analysis is also performed to know the yearly averages of the AQI across stations used in the study. Findings: Our results confirm that there exists a negative association between AQI and stock returns for top-performing growth stocks. The results also indicate that there is a positive association between AQI and capital intensive industry stocks, while a negative association was observed in the case of labor-intensive industries. The findings indicate that AQI is a predictor for stock returns in India in the short term. Application: Environmental influences on stock market performance are becoming more potent than ever before as the negative externalities of pollution impact the financial performance of corporations. Keywords: Air Quality Index, Stock Performance, Environmental Policy, Indian Stock Market, Air Pollution.
Highlights
India is consistently dominating the list of world’s most polluted cities in the world from past few decades
Some stations’ yearly average is toxic exceeding 100 μg/m3. Such toxic levels of air quality index (AQI) adversely affect physical and psychological well-being of the population and can be deemed to impact the well-being and moods of the investors
This study explores the response of Indian stock market to physical environmental stimuli, especially with regard to AQI in short term
Summary
India is consistently dominating the list of world’s most polluted cities in the world from past few decades. Air pollution, which itself is a negative externality of economic growth, becomes a strong predictor for financial market performance [1]. Studies have attempted to understand the relationship between air pollution and stock performance from various perspectives. Most popular perspective is where studies have established that environmental stimuli can significantly affect the performance of stocks as they affect the investor mood and sentiments [1,2,3]. Another perspective is where pollution information and environmental awareness play important role in stock performance [4]. A few studies associate reactions to environmental regulation and company’s environment protection efforts as an indicator of stock performance [5,6,7]
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