Physical Climate Change and the Sovereign Risk of Emerging Economies
52 Pages Posted: 3 Sep 2020 Last revised: 4 May 2021
Date Written: May 1, 2021
I show that rising temperatures can detrimentally affect the sovereign creditworthiness of emerging economies. To this end, I collect long-term monthly temperature data of 54 emerging markets. I calculate a country's temperature deviation from its historical average, which approximates present-day climate change trends. Running regressions from 1994m1-2018m12, I find that higher temperature anomalies lower sovereign bond performances (i.e. increase sovereign risk) significantly for countries that are warmer on average and have lower seasonality. The estimated magnitudes suggest that affected countries likely face significant increases in their sovereign borrowing costs if temperatures continue to rise due to climate change. However, results indicate that stronger institutions can make a country more resilient towards temperature shocks, which holds independent of a country's climate.
Keywords: Climate Risks, Sovereign Risk, International Finance, Emerging Market Economies, Institutions
JEL Classification: Q54, Q56, G15, H63, O13
Suggested Citation: Suggested Citation