Abstract:Based on the existing theory of behavioral finance, we study the relationship between air quality and investor sentiment by taking the national PM2.5 index and the trading volume and price of Shanghai-Shenzhen 300 stocks as examples. We distinguish the different influences of the rational judgments and emotions on the relevant stocks in the performance of the stock market. We propose two mechanisms in which the air pollution can affect the stock performance: “accumulated conduction mechanism” and “emotional lag mechanism”. Using the vector autoregressive model and the panel data we constructed, we find that the national PM2.5 index has a significant positive impact on the increment of the Shanghai-Shenzhen 300 transactions, and has little effect on the price of the stock market.