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The effect of compound heat-drought risk on municipal corporate bonds pricing: Evidence from China

Author

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  • Lei, Ziqi
  • Li, Ping
  • Wang, Yujing

Abstract

This paper uses a dynamic copula model to measure compound heat-drought risk and examines its relationship with the issuing spread of China’s municipal corporate bonds. Local government financing vehicles that are more likely to be affected by compound heat-drought risk will pay more costs to issue municipal corporate bonds compared to vehicles unlikely to be affected by compound heat-drought risk. Mechanism analyses find that the compound heat-drought risk damages the solvency of local government financing vehicles and the implicit guarantee ability of local governments. Higher investor attention increases the spread of municipal corporate bonds. We also find that bonds with low credit ratings are more affected by compound heat-drought risk, and environmental actions based on green coverage rates are generally effective in reducing the compound heat-drought risk premium. Furthermore, the compound heat-drought risk has a greater impact on MCBs than extreme heat risk and extreme drought risk.

Suggested Citation

  • Lei, Ziqi & Li, Ping & Wang, Yujing, 2025. "The effect of compound heat-drought risk on municipal corporate bonds pricing: Evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:ecofin:v:79:y:2025:i:c:s1062940825001020
    DOI: 10.1016/j.najef.2025.102462
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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