Can municipal bonds hedge US state-level climate risks?

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Authors

Polat, Onur
Gupta, Rangan
Cepni, Oguzhan
Ji, Qiang

Journal Title

Journal ISSN

Volume Title

Publisher

Elsevier

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.

Description

DATA AVAILABILITY : Data will be made available on request.

Keywords

Stocks and bonds returns, Time-varying conditional correlation, ADCC-GARCH, Climate risks, QQ regressions, US states, Asymmetric dynamic conditional correlations (ADCC), Generalized autoregressive conditional heteroskedasticity (GARCH), Quantile-on-quantile (QQ), SDG-08: Decent work and economic growth, SDG-13: Climate action

Sustainable Development Goals

SDG-08:Decent work and economic growth
SDG-13:Climate action

Citation

Polat, O., Gupta, R., Cepni, O. et al. 2024, 'Can municipal bonds hedge US state-level climate risks?', Finance Research Letters, vol. 67, art. 105915, pp. 1-10, doi : 10.1016/j.frl.2024.105915.