Mid-term Climate Change Risk in Catastrophe Bond Market

Abstract

The catastrophe bond market is a good place to reveal how investors think about the climate risk in a mid-term foreseeable future. By studying catastrophe bond market transaction data, I find out that investors treat climate related bonds and non-climate related bonds differently. The yield difference between short-term climate related bonds and mid-term climate related bonds is significantly higher than the yield difference between short-term non-climate related bonds and mid-term non-related bonds. This yield difference is not caused by annual climate seasonality, different local property value growths, and different term structures. Tests on implied hazard rate of catastrophe bonds show similar results. I also find that the difference in yield difference between climate related bonds and non-climate related bonds gets larger after some major climate related disaster events happened between the year 2017 and the year 2018, which indicates that this difference could be connected to the investors perception of the uncertainty of future climate situations.