Working Paper: NBER ID: w30660
Authors: Paul Goldsmith-Pinkham; Matthew T. Gustafson; Ryan C. Lewis; Michael Schwert
Abstract: Municipal bond markets begin pricing sea level rise (SLR) exposure risk in 2013, coinciding with upward revisions to worst-case SLR projections and accompanying uncertainty around these projections. The effect is larger for long-maturity bonds and is not solely driven by near-term flood risk. We use a structural model of credit risk to quantify the implied economic impact and distinguish the effects of underlying asset values and uncertainty. The SLR exposure premium exhibits a different trend from house prices and is unaffected by house price controls. Taken together, our results highlight the importance of climate uncertainty in driving municipal bond prices.
Keywords: Sea Level Rise; Municipal Bonds; Climate Risk; Credit Spreads
JEL Codes: G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| uncertainty about future municipal cash flows (H74) | SLR exposure premium (G19) |
| SLR exposure premium (G19) | municipal bond prices (H74) |
| higher public concern about climate change (Q54) | larger SLR exposure premium (G19) |
| greater local taxation (H71) | larger SLR exposure premium (G19) |
| increased SLR projections (F17) | higher bond yields (E43) |
| SLR exposure (Y60) | higher bond yields (E43) |