When the Weather Turns Risky: Climate Shocks and U.S. State-Level Credit Risk

Abeeb Olaniran (), Xin Sheng (), Oguzhan Cepni () and Rangan Gupta ()
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Abeeb Olaniran: Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa
Xin Sheng: Lord Ashcroft International Business School, Anglia Ruskin University, Chelmsford, United Kingdom.
Oguzhan Cepni: Ostim Technical University, Ankara, Turkiye; University of Edinburgh Business School, Centre for Business, Climate Change, and Sustainability; Department of Economics, Copenhagen Business School, Denmark
Rangan Gupta: Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa

No 202604, Working Papers from University of Pretoria, Department of Economics

Abstract: Climate-related risks have become an increasingly important source of market disruption, with potential implications for credit markets. As such, this study examines whether and how climate risks influence credit risk, as measured by credit default swap (CDS) spreads. Using a U.S. state-level climate risk measure and a local projections framework, we analyze both linear and asymmetric effects of climate shocks on CDS spreads. The linear results provide strong evidence that climate shocks exert a positive and statistically significant impact on credit risk, with findings robust across multiple CDS tenors. Within a nonlinear framework, where climate risk serves as a regime-switching variable, we uncover asymmetric responses of CDS spreads across different maturities and term structures. Overall, the findings offer valuable insights for market participants, including investors and financial institutions.

Keywords: Climate Shocks; Credit Risk; Credit Default Swaps; Linear and Non-Linear Panel Frameworks (search for similar items in EconPapers)
JEL-codes: C23 C33 G32 Q54 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2026-02
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Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:202604

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