Sea Level Rise Exposure and Municipal Bond Yields

60 Pages Posted: 11 Nov 2019 Last revised: 10 Nov 2022

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

AQR Arbitrage, LLC

Multiple version iconThere are 2 versions of this paper

Date Written: November 9, 2022

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: 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 (November 9, 2022). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, 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

AQR Arbitrage, LLC ( email )

Two Greenwich Plaza
Greenwich, CT 06830
United States
2037423005 (Phone)

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