Sea Level Rise Exposure and Municipal Bond Yields

Abstract

Coinciding with upward revisions of sea level rise (SLR) projections, municipal bond markets begin pricing increased risk of SLR exposure in 2013. The effect is larger for long-maturity bonds and is not solely driven by near-term flood risk. We apply a structural model of credit risk to quantify the implied economic impact and distinguish the effects of underlying asset values and uncertainty. The SLR exposure premium exhibits a different trend than house prices and is unaffected by controlling for them, which suggests that uncertainty about SLR's future impact, rather than reduced current asset values, drives the effect on bond prices.

Keywords: climate change, sea level rise, asset prices, municipal bonds, credit risk

JEL Classification: G1, G12