Climate change continues to deteriorate the world around us, causing warmer temperatures, droughts, increased sea-levels, and various other climate fluctuations and shocks all over the world. Through this deterioration, the economic impact of our rapidly declining climate conditions is only becoming more and more prevalent. In this paper, we analyze how the U.S., as a world-leading economy is impacted by climatological conditions in order to answer what effects such conditions have on the economy as a whole. We use municipal bond returns as a benchmark of economic efficiency, due to their interconnectedness with other financial markets. They also represent investors' perceptions of market conditions and credit risk. In order to study how climate fluctuations affect the directionality of the municipal bond market, we employ a Cross-Quantilogram Correlation methodology, which is summarized in heatmap format on a regional level. Furthermore, the Local Projection framework is employed to capture the dynamic responses of the variables. Our findings suggest an overall negative relationship between municipal bond returns and droughts, which varies in strength regionally. Furthermore, sea-level is shown to impact certain regions' municipal bond returns negatively, although this effect is not as prevalent. The Local Projections suggest that there is a benchmark relationship between municipal bond returns and climate shocks of various natures. For the majority of states, our findings suggest an initial, in some cases slightly lagged, decrease in municipal bond returns, followed by a period of recovery, normally around three weeks after the initial shock takes place. There are notable deviations from this relationship, for example, Alabama and Louisiana, which seem to react positively to climate shocks. Furthermore, few states do not necessarily undergo a recovery period during the studied period, suggesting that the negative impact that climate shocks have on the municipal bond market in said states lasts for a minimum of four weeks. However, the Local Projection findings should be taken lightly, due to the absence of statistical significance.
| Identifer | oai:union.ndltd.org:UPSALLA1/oai:DiVA.org:liu-205307 |
| Date | January 2024 |
| Creators | Dahlgren, Henrik, Santesson, Patricia |
| Publisher | Linköpings universitet, Nationalekonomi, Linköpings universitet, Filosofiska fakulteten |
| Source Sets | DiVA Archive at Upsalla University |
| Language | English |
| Detected Language | English |
| Type | Student thesis, info:eu-repo/semantics/bachelorThesis, text |
| Format | application/pdf |
| Rights | info:eu-repo/semantics/openAccess |
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