A new Israeli study indicates that traders don’t perform as well when it’s smoggy outside, affecting markets far beyond New York.
They say a butterfly flapping its wings in Costa Rica can impact societies on the other side of the globe. New research in on that tangent: Smog days in New York can weaken stock market traders in Philadelphia.
As reports from the US Environment Protection Agency demonstrate, the effects of smog on Americans’ health are tangible. Poor air quality from cars, taxis, buses and industry lead to diseases like cancer, asthma and emphysema.
Now, there’s news from Israel that zeroes in on another unexpected outcome of smog: According to University of Haifa finance researcher Joseph Yagil and Netanya Academic College economist Tamir Levy, traders on Wall Street perform less well, and appear to be more averse to taking risks, on smoggy days than when the air is clear.
Their study, reported in the Journal of Economic Psychology, found a link between the air quality index in New York City and the returns on Wall Street stocks. The two researchers intend to take their findings to Europe, China and other Far East countries.
Buy low, sell smoggy
Yagil tells ISRAEL21c that he hopes the results will impact policymaking in terms of improving air quality. “Yes, more or less that’s what we have written at the end of the paper – there are policy implications. These findings present another aspect of air pollution, another area with negative consequences,” he says.
The researchers decided to study this area after reading a previous study that found air pollution can cause depression, anger and anxiety. They hypothesized that smoggy days could lead to other emotional responses as well, arguing that smog “may lead to a collective change in the level of risk aversion, resulting in lower stock returns.”
Looking at daily stock returns correlated with air quality indices over a significant period of 10 years, from 1997 to 2007, they came to a conclusion that Freakonomics buffs are sure to appreciate: Stocks were down on the days that the air quality was poor.
They noted: “These findings lend support to the relationship between air pollution and mood established by psychologists, and the relationship between mood and economic consequences established by economists. Mood has an impact on decision-making, one type of which is an investment in stocks.”
How a tailpipe in New York blows on Philly
More than one stock market was surveyed in the report, which included trading data from the S&P 500, the Dow Jones Industrial Average, the NASDAQ Composite Index, the AMEX Composite Index and the Philadelphia Stock Exchange Utility Sector Index.
Air quality index measurements were taken from stations near Wall Street and over the bridge in Kings County (Brooklyn). The researchers reported that New York’s air pollution impact reached far and wide to other trading floors, including those in Philadelphia.
“One implication of this study is that if air pollution is negatively related to stock returns, one can devise an investment strategy that can lead to abnormal profits,” they write.
“The relationship becomes weaker as the distance of the stock exchange from the polluted area increases. The results also indicate that air pollution may even affect local traders investing in securities exchanges located far from the polluted area. The findings imply that a profitable trading strategy can be constructed.”
Bloggers are reporting that armed with this information, investors could make a killing off bad air days by looking at trade markets around the world – that is, at least in markets where computers aren’t doing most of the trading transactions.
Further studies in some of the world’s more polluted cities will depend on data availability, says Yagil, who like any rational economist, adds: “We did this for the sake of science, frankly.”