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Kling, Gerhard and Lo, Yuen C. and Murinde, Victor and Volz, Ulrich (2018) Climate Vulnerability and the Cost of Debt.

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Abstract

We use indices from the Notre Dame Global Adaptation Initiative to investigate the impact of climate vulnerability on bond yields. Our methodology invokes panel ordinary least squares with robust standard errors and principal component analysis. The latter serves to address the multicollinearity between a set of vulnerability measures. We find that countries with higher exposure to climate vulnerability, such as the member countries of the V20 climate vulnerable forum, exhibit 1.174 percent higher cost of debt on average. This effect is significant after accounting for a set of macroeconomic controls. Specifically, we estimate the incremental debt cost due to higher climate vulnerability, for the V20 countries, to have exceeded USD 62 billion over the last ten years. In other words, for every ten dollars they pay in interest cost, they pay another dollar for being climate vulnerable. We also find that a measure of social readiness, which includes education and infrastructure, has a negative and significant effect on bond yields, implying that social and physical investments can mitigate climate risk related debt costs and help to stabilize the cost of debt for vulnerable countries.

Item Type: Monographs and Working Papers (Working Paper)
Keywords: Climate Risk, Climate Vulnerability, Cost of Debt, V20, Climate Change
SOAS Departments & Centres: Departments and Subunits > School of Finance & Management
Departments and Subunits > Department of Economics
Date Deposited: 04 Jul 2018 08:48
URI: http://eprints.soas.ac.uk/id/eprint/26045
Related URLs: https://papers. ... ract_id=3198093
Funders: Other

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