A Study On The Impact Of Climate Drought Risk On Corporate Bond Pricing

Climate change is the most important issue facing human society in the 21st century,and climate change risks are mainly divided into physical and transition risks.Physical risks are related to the direct economic losses caused by climate change,which mainly affect macroeconomic and financial stability by affecting the balance sheets of economic agents,including risks caused by extreme weather conditions(such as hurricanes,floods and droughts),sea level rise or persistent high temperatures;transition risks refer to the risks associated with the transition to a low-carbon economy,including policy and legal risks(such as carbon pricing mechanisms Transition risk refers to the risks associated with transitioning to a low-carbon economy,including policy and legal risks(such as carbon pricing mechanisms and climate-related litigation),technology risks(such as the competitiveness impact of energy-efficient technology improvements or innovations on certain companies),market risks(such as changes in consumer habits due to climate change),and reputation risks(such as the failure of a company’s low-carbon transition that affects its market position).Climate extremes caused by global warming will bring irreversible and catastrophic consequences to the earth on which human beings depend for survival and development,not only affecting personal health and social well-being but also posing a great threat to economic and social development and financial system stability.In particular,climate finance has sparked widespread concern in academia and industry.In the field of climate finance research,the existing literature has mainly studied climate risk and asset pricing,climate risk and financial stability,and tools and policies for climate risk management.In particular,the question of whether climate risk is priced by financial assets remains to be explored.Existing studies mainly focus on issues related to climate risk and stock prices,climate risk and real estate prices,and climate risk and municipal bonds,while relatively less research has been conducted on the relationship between ordinary corporate bonds and climate risk.However,corporate bonds,as one of the important financing instruments in the financial market,have a very important position as they can help companies reduce financing costs,expand the market and improve their credit ratings.Therefore,this paper explores the relationship between climate risk and asset pricing from the perspective of corporate bonds.Using January 2010 to December 2020 as the sample period,corporate bonds issued by A-share listed companies in Shanghai and Shenzhen are selected as the research objects,and corporate bond credit spread and yield to maturity are taken as the explanatory variables to reflect their issue pricing,and the Palmer drought index is used to portray climate(physical)risk and take it as the core panel data model,heterogeneity analysis and robustness test are applied to empirically examine the impact of climate change risk on corporate bond pricing.Preliminary analysis reveals that the correlation coefficient between the Palmer drought index and corporate bond yield to maturity is-0.0665,and the correlation coefficient between the Palmer drought index and corporate bond credit spread is-0.0147,both showing significant negative correlations,indicating that an increase in the degree of drought(a decrease in the value of the drought index)increases the yield to maturity of corporate bonds and the bond credit spread required by investors.spreads.The regression results show that drought risk has a significant impact on the credit spread of corporate bonds.The greater the drought risk in the place where the issuing company is located,the greater the credit spread and Yield to maturity of corporate bonds when they are issued.In addition,whether based on replacing core explanatory variables or robustness test based on adding control variables,the research conclusion is still valid,which indicates that the research results of this paper are robustness.The mechanism analysis verified the transmission mechanism of drought risk.Finally,research indicates heterogeneity in the impact of drought risk on corporate bond pricing.This article not only provides evidence from the perspective of corporate bonds for climate risk pricing research,but also provides some inspiration for climate change analysis and corporate bond pricing.