The impact of natural disasters on US business credit markets: a comparative analysis of short-term and long-duration events

Abstract

This paper examines the impact of severe natural disasters on the US corporate credit market, highlighting the different responses to short-term versus long-term disasters. Using Jordá local projections, our analysis shows that short-term disasters, such as severe storms and tropical cyclones, increase the probability of corporate defaults without causing significant financial tightening by institutional investors. In contrast, long-term disasters, such as droughts and wildfires, lead to increased corporate default risks and financial tightening. This difference in investor reactions can be attributed to the greater uncertainty about the financial health of firms caused by long-term disasters compared to short-term disasters. The damage from long-term disasters is spread over time and can last for years, making them less adequately covered by insurance and less likely to receive timely government aid than short-term hazards. These findings underscore the need for comprehensive insurance products for long-term catastrophes and increased government support for long-term recovery efforts.