Sea Level Rise Exposure and Municipal Bond Yields

47 Pages Posted: 11 Nov 2019 Last revised: 8 May 2020

See all articles by Paul S. Goldsmith-Pinkham

Paul S. Goldsmith-Pinkham

Yale School of Management

Matthew Gustafson

Pennsylvania State University - Smeal College of Business

Ryan Lewis

University of Colorado, Boulder

Michael Schwert

University of Pennsylvania - The Wharton School

Date Written: May 8, 2020

Abstract

We show that municipal bond markets began pricing sea level rise (SLR) exposure at the end of 2011, coinciding with upward revisions of SLR projections. The effect is present across maturities and is concentrated on the East and Gulf coasts, where storm risk is greatest. We apply a structural model of credit risk to show that municipal bond investors expect a one standard deviation increase in SLR exposure to correspond to a reduction of 3% to 8% in the present value or an increase of 2% to 4% in the volatility of the local government cash flows supporting debt repayment.

Keywords: climate change, sea level rise, asset prices, municipal bonds, credit risk

JEL Classification: G1, G12

Suggested Citation

Goldsmith-Pinkham, Paul S. and Gustafson, Matthew and Lewis, Ryan and Schwert, Michael, Sea Level Rise Exposure and Municipal Bond Yields (May 8, 2020). Available at SSRN: https://ssrn.com/abstract=3478364 or http://dx.doi.org/10.2139/ssrn.3478364

Paul S. Goldsmith-Pinkham

Yale School of Management ( email )

NY
United States

HOME PAGE: http://paulgp.github.io

Matthew Gustafson

Pennsylvania State University - Smeal College of Business ( email )

East Park Avenue
University Park, PA 16802
United States

Ryan Lewis (Contact Author)

University of Colorado, Boulder ( email )

Boulder, CO 80309-0419
United States

Michael Schwert

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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