Air pollution and stock returns: Evidence from a natural experiment

• Studies have shown that air pollution has biophysical and emotional effects.
• Finance scholars have documented that emotional changes affect trading decisions.
• We provide evidence that local air pollution affects domestic stock returns.
• We investigate who are the agents responsible for said effect.
• We find that said effect is at least partly mediated by the trading floor community.

Previous studies have documented the existence of a relationship between air pollution and people's moods and between people's moods and stock returns. To investigate if the link between local air pollution and domestic equity returns is mediated by the trading floor community, we use the transition of Italy's main stock exchange from a trading floor technology to an electronic and delocalized trading system as a natural experiment. In addition, we take advantage of differences in trading technology across a sample of major international stock exchanges. In both instances, we document the existence of an air pollution effect only when trading is conducted on the floor, which provides evidence in support of the view that the air pollution effect is at least partly mediated by the behavior of the trading floor community.