Can investors earn an excess risk-adjusted return on air pollution in the stock market: evidence from Thailand

Abstract

This study investigates the pricing of air pollution in the Thai equity market, using PM2.5 and the Air Quality Index (AQI) to determine if investors can earn excess risk-adjusted returns. Focusing on the SET100 index, the research employs long-short portfolio sorting strategies evaluated through CAPM and the Fama-French Three-Factor (FF3) model. Additionally, the study assesses 26 industry sectors to evaluate heterogeneous pricing impacts based on their operational characteristics. Empirical results reveal no evidence of a systematic, year-round pollution premium, suggesting that large-cap equities are structurally insulated from general sentiment shocks. However, highly conditional anomalies emerge during peak environmental distress; a significant PM2.5 premium appears strictly during Thailand’s acute seasonal smog crisis (March–April) under the FF3 framework, whereas the composite AQI fails to capture this effect. Fundamental analysis further confirms asymmetric sector heterogeneity: industries facing operational or mobility constraints suffer negative pricing penalties, while those benefiting from defensive mitigation demands capture significant positive premiums. Ultimately, air pollution triggers concentrated market inefficiencies strictly during seasonal crises and within fundamentally exposed sectors rather than market-wide contagion.