The effect of air quality index on return rate of China stock market: Empirical test based on GARCH model

Abstract

Continuous haze in China has become a social concern that affects people's moods and behavior. This paper uses GARCH model to examine whether air quality can be a proxy variable of emotion to affect stock market. The paper compounds national Air Quality Index (AQI) weighted by the proportion of investors in certain regions, as well as taking in all available data that ranges from January 1, 2014 to December 31, 2016. GRACH Model is applied to 4 periods of stock market: before bull market, bull market, bear market, after bear market, respectively. The result shows that air quality doesn't influence people's enthusiasm towards stock market during bull market period. However, AQI has distinctly negative correlation with return rate of stock market.