Does environmental issue matter? : effect of air pollution on the stock market performance

Air pollution is one of the most serious environmental issues. In Malaysia, the emission of air pollutants has increased in recent years. This study aimed to examine the impact of air pollution on sectoral indices in Malaysian stock market. The dependent variables used in this study were the daily return of 13 sectoral indices, while the independent variables were as follows: (i) the lagged daily return of sectoral indices; (ii) the lagged standard deviation of sectoral indices; and (iii) the Air Quality Index (AQI). The sample period of this study covered from 5 July 2019 to 8 April 2022. The findings showed that the lagged daily return only significantly affected the daily return of few sectors. Meanwhile, the lagged standard deviation significantly affected the daily return of all the sectoral indices, but not under all the market conditions. The lagged AQI and AQI also significantly affected the daily return of eight sectors, which included finance, property, construction, healthcare, technology, energy, utilities, and consumer sectors. Hence, investors need to observe the changes in the air pollution level and market conditions when making investment decision. These findings could help investors in identifying the environmental factors that need to be considered before investing in the stocks of particular sectors.