Natural Disasters and Municipal Bonds

Posted: 30 Dec 2021 Last revised: 1 Mar 2022

See all articles by Jun Kyung Auh

Jun Kyung Auh

Yonsei University - School of Business

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance; Yonsei University - School of Business

Tatyana Deryugina

University of Illinois

Tim Park

The University of Texas at Austin

Multiple version iconThere are 2 versions of this paper

Date Written: January 29, 2022

Abstract

Climate change is increasing the frequency of extreme weather events and natural disasters, which could in turn make municipal bonds---a $4 trillion market in the US---a fundamentally riskier asset class. We study the effect of natural disasters on municipal bond returns and volatilities, exploiting the repeat sales approach to overcome the challenge that municipal bonds trade extremely infrequently. Natural disasters have substantial price and volatility effects: the average return of disaster-affected counties is -0.37% in the disaster month with average volatility higher by 4.11% , translating into investor losses of $15.28 billion across all counties in our sample. The negative price effect is more than twice as large for revenue bonds and is non-existent for the majority of general-obligation bonds of issuers, suggesting that revenue diversification and local financial conditions play a key role in bond price stability. Federal disaster aid mitigates the negative price effects, highlighting the importance of federal transfers for relieving local financial burdens in the aftermath of natural disasters.

Keywords: Natural Disasters, Climate Change, Municipal Bonds, Municipal Financing, Repeat Sales

JEL Classification: G10, G14, Q54

Suggested Citation

Kyung Auh, Jun and Choi, Jaewon and Deryugina, Tatyana and Park, Tim, Natural Disasters and Municipal Bonds (January 29, 2022). Available at SSRN: https://ssrn.com/abstract=3996208 or http://dx.doi.org/10.2139/ssrn.3996208

Jun Kyung Auh

Yonsei University - School of Business ( email )

50 Yonsei-ro, Seodaemun-gu
Seoul, 120-749
Korea, Republic of (South Korea)

Jaewon Choi (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://https://sites.google.com/site/jaewchoi1203

Yonsei University - School of Business ( email )

50 Yonsei-ro, Seodaemun-gu
Seoul, 120-749
Korea, Republic of (South Korea)

Tatyana Deryugina

University of Illinois ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://deryugina.com

Tim Park

The University of Texas at Austin ( email )

Red McCombs School of Business
Austin, TX 78712
United States

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