Abstract
This paper answers the research question of the impact of extreme climate phenomena on bond returns. The question in answered by means of a factor model. Particularly, we add a climate factor to the classical bond market factors. The climate factor is constructed leveraging a novel methodology that permits the transposition of country-level climate related GDP losses into firm-level climate related fixed assets losses. The climatic factor proxies for the risk factor in bond returns related to extreme climate phenomena. The sensitivities of bond portfolios to the climatic factor are found to be statistically highly significant in most cases. We supplement the analysis with a climate stress test able to show the impact of plausible but more severe extreme climate phenomena on bond returns.
Published Version
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