Natural Disasters and Municipal Bonds
52 Pages Posted: 30 Dec 2021 Last revised: 3 Oct 2022
Date Written: July 1, 2022
Climate change is increasing the frequency of natural disasters, which could make municipal bonds a riskier asset class. We study the effects of natural disasters on municipal bond returns, exploiting the repeat sales approach to overcome the challenge that municipal bonds trade extremely infrequently. We find substantial price effects that materialize gradually: returns of uninsured bonds fall slowly in the weeks following a disaster, by 0.31% on average, translating into investor losses of almost $10 billion. Source of bond revenue, bond insurance, disaster severity, federal disaster aid, and local financial conditions all affect the magnitude of the price effects.
Keywords: Natural Disasters, Climate Change, Municipal Bonds, Municipal Financing, Repeat Sales
JEL Classification: G10, G14, Q54
Suggested Citation: Suggested Citation