Working Paper: CEPR ID: DP17516
Authors: Viral Acharya; Timothy Johnson; Suresh Sundaresan; Tuomas Tomunen
Abstract: We exploit regional variations in exposure to heat stress to study if physical climaterisk is priced in municipal and corporate bonds as well as in equity markets. We findthat local exposure to damages related to heat stress equaling 1% of GDP is associatedwith municipal bond yield spreads that are higher by around 15 basis points per annum(bps), the effect being larger for longer-term, revenue-only and lower-rated bonds, andarising mainly from the expected increase in energy expenditures and decrease in laborproductivity. Among S&P 500 companies, one standard deviation increase in exposureto heat stress is associated with yield spreads that are higher by around 40 bps for sub-investmentgrade corporate bonds, with little effect for investment grade bond spreads,and with conditional expected returns on stocks that are higher by around 45 bps.These results are (i) observed robustly only starting in 2013–15, (ii) mostly absent forphysical risks other than exposure to heat stress, and (iii) consistent with the class ofmacroeconomic models where climate change has a direct and large negative impact onaggregate consumption.
Keywords: climate change; global warming; heat stress; corporate bonds; municipal bonds; credit risk; equity risk premium
JEL Codes: G12; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| heat stress exposure (J81) | municipal bond yield spreads (H74) |
| heat stress exposure (J81) | sub-investment grade corporate bond yield spreads (G33) |
| heat stress exposure (J81) | conditional expected returns on stocks (G17) |
| increased energy expenditures (Q41) | municipal bond yield spreads (H74) |
| decreased labor productivity (J29) | municipal bond yield spreads (H74) |
| heat stress exposure (J81) | credit spreads (G12) |
| adaptation strategies (O36) | economic costs associated with heat stress (J30) |