Climate Policy Uncertainty and Corporate Bond Returns

Abstract

We investigate the impact of climate policy uncertainty (CPU) on the pricing of corporate bonds in the United States market from 2015 to 2024. We have developed βCPU, which is a metric that measures the bond covariance with the climate policy uncertainty index. Our findings indicate that the climate policy uncertainty is priced in corporate bond market. We discovered that there is a negative correlation between βCPU and future excess returns, which is consistent with the Merton intertemporal capital asset pricing model. Additionally, investors are willing to pay higher prices for bonds with high βCPU to mitigate the risk of climate policy uncertainty. Our results indicate that the total influence of βCPU is -7.57 during high CPU months, this implies that a 1 unit increase in βCPU results in a −7.57 basis point decrease in future excess bond returns. Nevertheless, we discovered that the impact does not considerably differ with the bond maturity.