Conference Agenda

Extreme weather events, intensified by climate change, have increasingly disrupted economies, underscoring the urgent need to understand how physical climate risks affect local financing costs. This paper examines the impact of extreme rainfall risk on local financing costs using county-level precipitation data and urban investment bonds in China. Our results reveal that a one-day increase in the frequency of extreme rainfall in the previous year raises bond spreads by approximately 4 basis points. We identify economic losses, media coverage, and flight delays as macro-level mechanisms and find that market participants are more sensitive than local governments to climate risks, reflecting differing levels of climate change awareness. While adaptation bonds effectively reduce the negative impact of extreme rainfall on financing costs, we find no evidence that extreme rainfall risk affects local bond issuance behavior, further supporting the conclusion that market mechanisms dominate. This study advances the literature by clarifying how climate risks are priced in bond markets and by emphasizing the critical role of adaptive financial instruments in managing physical climate risks.