Climate change risk and bond risk premium

This study explores how worries about climate change influence bond risk premiums, with an emphasis on Chinese Treasury bonds that have maturities ranging from 2 to 5 years. We develop a Climate Change Concern Index based on textual analysis of analyst reports and contrast it with multiple well-known risk and uncertainty indices. Our results reveal that the Climate Change Concern Index significantly predicts bond risk premiums, particularly for 2-year bonds, indicating heightened sensitivity among short-term bond investors to climate change risk. The index consistently surpasses traditional risk and uncertainty measures in predictive analyses, both in-sample and out-of-sample, showcasing its enhanced predictive capability. Seasonal variations further show that the index's predictive ability is stronger during low pollution periods. Robustness checks across different forecasting intervals reinforce the reliability of these findings. Overall, this research highlights the significance of incorporating climate change concerns into financial risk evaluations and investment strategies, offering valuable insights for investors, policymakers, and researchers.