Abstract: We examine the effect of wildfire smoke on establishment-level outcomes and the outlook of the local business environment. Excluding areas directly hit by wildfires, we find that local business establishments lose approximately 10% of sales on days with elevated wildfire smoke exposure. We find no pre-treatment trends and that effects are larger and longer lasting in consumer-oriented industries, which exhibit a 20% (15%) sales reduction in the year of (following) the smoke shock. Further tests indicate a decline in retail establishment visits, suggesting a smoke-induced reduction in local consumer demand as the primary driver of our results. Turning to longer term county-level establishment outcomes, we confirm impacts over multiple years following smoke shocks on both the intensive (i.e., average establishment employment) and extensive (i.e., number of establishments) margins. Long term establishment responses are concentrated in areas where the population is worried about climate change risk, suggesting that transient smoke exposure acts as a salience shock leading to longer term climate adaptation.
Discussant: Ryan Israelsen, Michigan State University
Ana-Maria Tenekedjieva, Federal Reserve Board of Governors
Abstract: This paper studies how homeowners insurance markets respond to growing climate losses and how this impacts mortgage market dynamics. Using Florida as a case study, we show that traditional insurers are exiting high risk areas, and new lower quality insurers are entering and filling the gap. These new insurers service the riskiest areas, are less diversified, hold less capital, and 20 percent of them become insolvent. We trace their growth to a lax insurance regulatory environment. Yet, despite their low quality, these insurers secure high financial stability ratings, not from traditional rating agencies, but from emerging rating agencies. Importantly, these ratings are high enough to meet the minimum rating requirements set by government-sponsored enterprises (GSEs). We find that these new insurers would not meet GSE eligibility thresholds if subjected to traditional rating agencies’ methodologies. We then examine the implications of these dynamics for mortgage markets. We show that lenders respond to the decline in insurance quality by selling a large portion of exposed loans to the GSEs. Our results show that the GSEs bear a large share of insurance counterparty risk, which is driven by their mis-calibrated insurer eligibility requirements and lax insurance regulation. We quantify the counterparty risk by examining the surge in serious delinquencies and foreclosure around the landfall of Hurricane Irma.
Jaewon Choi, University of Illinois-Urbana-Champaign
Tatyana Deryugina, University of Illinois-Urbana-Champaign
Tim Park, University of Texas-Austin
Abstract: Climate change is increasing the frequency of natural disasters, and the municipal bond market could be particularly vulnerable to this trend. We undertake a comprehensive analysis of how and when natural disasters affect municipal bond returns. We find substantial price effects that materialize gradually in the weeks following a disaster, translating into in-sample investor losses of almost $10 billion. These effects are influenced by a range of factors that point to the mechanisms behind the observed response, including the source of bond revenue, bond insurance, disaster severity, federal disaster aid, and local financial conditions. Our findings have significant implications for investors, policymakers, and anyone concerned with the long-term stability of financial markets.
Discussant: Peter Iliev, Pennsylvania State University
