Working Papers
January 2023, No. 23-01R
Leveraging the Disagreement on Climate Change: Theory and Evidence (Revised May 2024)
We develop a credit model where agents disagree on when long-run disaster risk, such as flooding from sea level rise (SLR), will damage collateral assets. Unlike existing models, ours predicts that pessimistic agents are more likely to leverage risky asset purchases, and prefer debt contracts with longer maturities. Intuitively, anticipating high risk of collateral damage, pessimists value the implicit insurance in the option to default. Using high-resolution SLR projections and comprehensive coastal real estate and mortgage data, we find robust evidence of these predictions. We also analyze how securitization and other policies affect the mortgage market's SLR exposure.
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