The impact of climate risk on municipal bonds pricing: Evidence from Chinese Chengtou bonds

Due to global warming, extreme climate events have become increasingly frequent, posing new challenges to both the real economy and the financial system. In this paper, we construct both extreme temperature and precipitation risk indicators as two proxies for climate risk to examine their impact on the pricing of Chinese Chengtou bonds. The main findings are summarized as follows. First, both extreme temperature and precipitation risks significantly increase the issuance spreads of Chinese Chengtou bonds, and the main findings are supported by a series of robustness checks. Second, mechanism analyses reveal that extreme temperatures weaken the solvency of LGFVs and the implicit guarantees of local governments, while extreme precipitation has no such effect. Third, heterogeneity analysis reveals that climate risk has a greater impact on Chengtou bonds that receive more public attention and are issued by platforms at higher administrative levels, while no significant differences are observed across bond maturities.