Can Municipal Bonds Hedge US State-Level Climate Risks?

Onur Polat (), Rangan Gupta, Oguzhan Cepni and Qiang Ji ()
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Onur Polat: Department of Public Finance, Bilecik Seyh Edebali University, Bilecik, Turkiye
Qiang Ji: Institutes of Science and Development, Chinese Academy of Sciences, Beijing, China; School of Public Policy and Management, University of Chinese Academy of Sciences, Beijing, China

No 202419, Working Papers from University of Pretoria, Department of Economics

Abstract: Using daily data on municipal bonds and equity returns from the 50 US states over the period from May 2, 2006, to February 9, 2024, we find that barring extreme periods of financial, macroeconomic, and health crises, the underlying conditional correlation between these two assets is negative, as derived from the Asymmetric Dynamic Conditional Correlations (ADCC)-Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model. When we utilize the Quantile-on-Quantile (QQ) regression model to 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 portfolio allocation implications for investors.

Keywords: Stocks and bonds returns; Time-varying conditional correlation; ADCC-GARCH; Climate risks; QQ regressions; US states (search for similar items in EconPapers)
JEL-codes: C22 C32 G10 G12 Q54 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2024-04
New Economics Papers: this item is included in nep-env, nep-fmk and nep-rmg
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Citations: View citations in EconPapers (1)

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