1. Stock performance and air pollution
Dingteng Huang
Shuang Liang
Nan Li
Puyi Fang
Yiwei Yan
2.
3. Rapid economic growth in Asia, especially in China.
• China is the world’s second largest economy
• GDP growth rate is about 7% in 2014
• ShangHai is the the economic center of China
• ShangHai Stock Exchange
Terrible air quality in China: especially Beijing and
ShangHai
• Most important air quality figures : PM 2.5
• Other parameter : PM10, SO2, NO2
• Influence on people work and life
Background
4. Object and Hypothesis
Object
• Observe and analyze the relationship between stock
returns of different industries and air quality in Shanghai
Hypothesis
• Air quality, especially PM 2.5 has a significant effect on
various stock returns.
• The more terrible the air quality is, the higher the stock
return in heavy industry.
5. Data Collection
Time period: 2012 -2015
Stock Price Data
• daily adjusted close prices of different industries
• Discrete and log returns of stock price
Air Quality Data
• Daily Average PM 2.5
• Daily Max PM 2.5
• Daily Average PM 10
• Daily Average SO2
• Daily Average NO2
6. Key Variables
Dependent Variable
• SSEDiscete-n is the discrete stock return of SSE
• SPCReturn is Shanghai petrochemical company stock return
• SHEReturn is Shanghai Electric Power stock return
• SPEReturn is Shanghai DaTun Energy Company stock return
• SEEPostive-n is a binary variable that equal 1 if SSE stock return is
positive, otherwise is zero
Independent Variables
• PM25Average is the Average daily figure of PM 2.5
• PM25Max is the highest PM 2.5 reached each day
• PM10 is the Average daily figure of PM 10
• SO2 is the Average daily figure of SO2
• NO2 is the Average daily figure of NO2
7. Key Variables
Seasonality
• Q2, Q3, Q4
• Represents the second quarter, third quarter, and fourth quarter of
a year respectively
• Dummy Variable
• Base group : Q1
• The seasonality has a significant impact on both stock price and
air quality
Unheal-25100
• Represents if PM 2.5 is greater than 100, it is unhealthy.
• Dummy Variable
8. • No previous research on the same topic
• First, we need to run every possible regression from all the variables
we have in order have a base data group.
• Co-linearity Problem
Research Logic
10. • Solution to Co-linearity Problem (orthogonalize)
– Regression PM2.5 vs. PM2.5Max
– Regression PM2.5 vs. PM10
– Use residuals to replace PM2.5Max and PM10
• 3 Stage filtering
Research Logic
Base
Regression
Group Advance
Regression
Group
Log vs. Simple
Lag 0 day vs.1day
vs. 3day
Final
Regression
Group
Drop and modify
Variables base on
F-test
11. • Same day simple return
• Shanghai Bao Steel Company daily return vs. PM2.5
• BaoReturn = 0.0002857 – 0.00153*PM2.5Averag + 0.001205*Q3 + 0.0037935*Q4 + μ
(0.0011943) (0.00153) (0.00137) (0.00133)
• F(3,721) = 2.91 significant at 95%
• Steel industry has always been a large source of pollutions historically
• that PM2.5 index has an negative impact on the return of Bao Steel
• showing the market’s reaction towards air pollution in Shanghai
Regression Analysis & Finding
13. • SSEDiscreteReturn =
-0.0016134 + 0.00507*S02 + 0. 00197*N02
(0.0011369) (0.00409) (0.00201)
+ +
+ 0.0013873*Q3 + 0.001821*Q4 – 0.0022324*UnhealthyPM2.5+ μ
(0.001049) (0.001087) (0.0011373)
-
• F-stat(5,710) of 2.10 which is significant at 94% confidence level.
• A negative beta of unhealthy PM 2.5 index, that is significant at 95%,
aligned with our hypothesis that, if the former day’s PM 2.5 index
exceed the healthy level, for the following day the return of SSE
Composite Index daily return will decrease by 0.22324%.
SSE Composite Index Return (000001.SS)
14. • SPCReturn = -0.0021294 + 0. 00975*PM10 + 0. 0083*NO2 –0.0045505*UnhealthyPM2.5+ μ
(0.0022307) (0.00578) (0.00449) (0.0026083)
+ + -
• F-stat(3,720) of 2.14 which is significant at 91% confidence level.
• A positive beta of PM 10 index and daily average NO2, that is significant
at 90% confidence level.
• For the following day, one mg/m3 increase in PM 10 will positively
impact the return of SPC daily return by 0. 975%
One 1 mg/m3 increases in NO2 will positively impact the return of SPC
daily
return by 0.83%.
• SPC is the largest petrochemical company located in Shanghai, which
engaged in production of ethylene, fiber, resin and plastics. One of main
pollution sources of NO2 and PM 10 in Shanghai are come from SPC.
Shanghai Petrochemical company
15. SHEReturn = -0.0045377 – 0.0037*PM2.5Max + 0.00299*PM10 + 0.01808*SO2
(0.0021054) (0.00447) (0.00433) (0.00709)
+0.00239*NO2 + 0.0034606*Q3 – 0.0060768*UnhealthyPM2.5 + μ
(0.00363) (0.0018325) (0.002122)
• F-stat(6,717) of 2.31 which is significant at 95% confidence level.
•A positive beta of SO2, that is significant at 99% confidence level (T-stat =
2.55), also a negative beta of Unhealthy PM 2.5 index(T-stat = -2.88), that is
significant at 99% confidence level.
• SHE is the largest electric power company located in Shanghai. The coal
burning plants are the biggest pollution source of PM2.5 and NO2. The biggest
coal consuming factory at Shanghai is the SHE company
Shanghai Electric Power Company
16. •PM2.5PortReturn =
0.0031607 + 0.00462*PM2.5 – 0.01482*SO2 – 0.0022936*Q2 + μ
(0.0021151) (0.00395) (0.001094) (0.0024741)
+ + -
This is the only model that the coefficient of SO2 is negative and the
intercept is a positive number.
PM2.5 Portfolio
18. Shanghai Electric Power (SHE)
Screening rules: |Z|>1.96, high confidence level
Daily average SO2, 96% confidence level
Increase the probability of positive return of SHE
by roughly G (0.15%) on the next trading day
19. Heavy industries portfolio
Screening rules: |Z|>1.96, high confidence level
Daily maximum PM 2.5 index, 80% confidence level
Increase the probability of positive return of our
portfolio by roughly G (0.58%) on the next trading day
20. SSE Composite Index Return
Screening rules: |Z|>1.96, high confidence level
Daily average NO2 , 85% confidence level
Increase the probability of positive return of SSE index
by roughly G (0.53%)
1. Rapid development of heavy industries
2. One of the most important economic lifeline
21. Environmental Friendly Portfolio
Screening rules: |Z|>1.96, high confidence level
Daily average PM 10 index, 98% confidence level
Increase the probability of positive return of our
portfolio by roughly G (0.98%) on the next trading day
Arouse the social concern on developing
environmental friendly enterprise
22.
23. • Air quality, especially PM 2.5 has a significant effect on
stock returns
• The stock performance is affected by the air quality during
the day or day before“3rd and 4th” quarter binary variable
has significant effect on the stock performance
