Abnormal weather shocks and US state level municipal bond returns

• Abnormal weather shocks cause delayed but persistent declines in U.S. municipal bond returns. • Municipal bond returns fall about 35 bps after 4–6 months and 40 bps after one year. • Republican-led states show sharper short-term bond return declines after weather shocks. • Medium-term effects converge, indicating widespread fiscal costs across all states. This paper investigates how abnormal weather shocks influence U.S. state-level municipal bond returns, offering evidence on the pricing of climate risk in local public debt markets. Using a composite index of standardized weather anomalies and a panel local projections framework, we find delayed but persistent negative effects of abnormal weather shocks on municipal bond returns. Returns remain stable initially but decline by about 35 basis points after four to six months and by 40 basis points after one year, indicating gradual repricing as fiscal and credit conditions adjust. Furthermore, we document partisan asymmetries: bonds issued by Republican-led states exhibit sharper short-term declines, reflecting weaker climate policies and adaptation efforts. Over the medium term, the effects converge across states, suggesting that abnormal weather shocks ultimately impose real and widespread fiscal costs on municipalities, regardless of political orientation.

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Publication Details

Journal
Finance research letters
Published
2026-01-30
DOI
https://doi.org/10.1016/j.frl.2026.109591
Primary Topic
Fiscal Policies and Political Economy
Type
article
Field-Weighted Citation Impact
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article

Abnormal weather shocks and US state level municipal bond returns

Ufuk Can, Oguzhan Cepni, Ahmet Faruk Aysan
Finance research letters
Fiscal Policies and Political Economy
article

Abnormal weather shocks and US state level municipal bond returns

Ufuk Can, Oguzhan Cepni, Ahmet Faruk Aysan
article en

Abstract

• Abnormal weather shocks cause delayed but persistent declines in U.S. municipal bond returns. • Municipal bond returns fall about 35 bps after 4–6 months and 40 bps after one year. • Republican-led states show sharper short-term bond return declines after weather shocks. • Medium-term effects converge, indicating widespread fiscal costs across all states. This paper investigates how abnormal weather shocks influence U.S. state-level municipal bond returns, offering evidence on the pricing of climate risk in local public debt markets. Using a composite index of standardized weather anomalies and a panel local projections framework, we find delayed but persistent negative effects of abnormal weather shocks on municipal bond returns. Returns remain stable initially but decline by about 35 basis points after four to six months and by 40 basis points after one year, indicating gradual repricing as fiscal and credit conditions adjust. Furthermore, we document partisan asymmetries: bonds issued by Republican-led states exhibit sharper short-term declines, reflecting weaker climate policies and adaptation efforts. Over the medium term, the effects converge across states, suggesting that abnormal weather shocks ultimately impose real and widespread fiscal costs on municipalities, regardless of political orientation.

Finance research lettersVol. 92
Australian National University (AU), Copenhagen Business School (DK), Central Bank of the Republic of Turkey (TR), Economic Research Forum (EG), Hamad bin Khalifa University (QA), Ostim Technical University (TR), University of Edinburgh (GB)
Climate action
Openalex Percentile: Top 77%
Fiscal Policies and Political Economy
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