Natural Disasters and Municipal Bonds
Posted: 30 Dec 2021 Last revised: 1 Mar 2022
Date Written: January 29, 2022
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: Suggested Citation