Can municipal bonds hedge US state-level climate risks?


POLAT O., Gupta R., Cepni O., Ji Q.

Finance Research Letters, vol.67, 2024 (SSCI) identifier

  • Publication Type: Article / Article
  • Volume: 67
  • Publication Date: 2024
  • Doi Number: 10.1016/j.frl.2024.105915
  • Journal Name: Finance Research Letters
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus, ABI/INFORM
  • Keywords: ADCC-GARCH, climate risks, QQ regressions, Stocks and bonds returns, Time-varying conditional correlation, US states
  • Bilecik Şeyh Edebali University Affiliated: Yes

Abstract

Using daily data on municipal bonds and equity returns from the 50 US states, we find barring extreme periods of financial, macroeconomic, and health crises, the underlying conditional correlation between these two assets is negative. When we capture the effect of climate risk quantiles on the entire conditional distribution of the underlying time-varying stock-bond correlation, we generally observe a negative impact at different levels of climate risks, although this could turn positive in the event of extreme climate disasters. In summary, the role of municipal bonds as a hedge against climate risks cannot be denied, carrying important implications for investors.