Working Paper: NBER ID: w30280
Authors: Jun Kyung Auh; Jaewon Choi; Tatyana Deryugina; Tim Park
Abstract: Climate change is increasing the frequency of natural disasters, which could make municipal bonds a riskier asset class. We study the effects of natural disasters on municipal bond returns, exploiting the repeat sales approach to overcome the challenge that municipal bonds trade extremely infrequently. We find substantial price effects that materialize gradually: returns of uninsured bonds fall slowly in the weeks following a disaster, by 0.31% on average, translating into investor losses of almost $10 billion. Source of bond revenue, bond insurance, disaster severity, federal disaster aid, and local financial conditions all affect the magnitude of the price effects.
Keywords: natural disasters; municipal bonds; climate change; bond returns
JEL Codes: G10; G14; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Natural disasters (H84) | Investor confidence (G24) |
| Natural disasters (H84) | Bond valuations (G12) |
| Bond insurance (H74) | Returns on uninsured municipal bonds (H74) |
| Disaster severity (H84) | Returns on uninsured municipal bonds (H74) |
| Federal disaster aid (H84) | Returns on uninsured municipal bonds (H74) |
| Natural disasters (H84) | Investor reactions (G40) |
| Disaster severity (H84) | Price impact on uninsured revenue bonds (H74) |
| Revenue diversification (H27) | Sensitivity to disaster shocks (H84) |
| Natural disasters (H84) | Returns on uninsured municipal bonds (H74) |