Shell-Shocked Investors : Earthquake Effect on Yield Spreads of Quasi-Municipal Bonds

Using a comprehensive data set of earthquakes in China, we show that investors perceive increased credit risk in quasi-municipal bonds exposed to devastating earthquakes, leading to a significant positive risk premium. Our study identifies that this bias is temporary and decreases as investors become more knowledgeable about earthquake hazards, supporting the salience theory. The magnitude of this irrational pricing bias is greater for longer-term bonds, lower credit ratings, and weaker government implicit guarantees. We rule out alternative explanations based on the financial underperformance of governments and firms in affected zones. Our research highlights a novel bond pricing factor associated with sudden natural disasters