Sea Level Rise Exposure and Municipal Bond Yields

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: 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