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Does the CDS market reflect regulatory climate risk disclosures?


Kölbel, Julian; Leippold, Markus; Rillaerts, Jordy; Wang, Qian (2020). Does the CDS market reflect regulatory climate risk disclosures? SSRN 3616324, University of Zurich.

Abstract

Climate change may have a detrimental effect on a firm's financial performance. Using a forward-looking measure of climate risk exposure based on textual analysis of firms' 10-K reports, we assess whether climate risks---as disclosed to the regulator---are priced in the credit default swap (CDS) market. We construct this novel climate risk measure based on BERT, an advanced language understanding algorithm, and adapt it for our purpose. We differentiate between physical and transition risks and find that transition risk increases CDS spreads, especially after the Paris Climate Agreement of 2015. However, we do not find such an effect for physical risk.

Abstract

Climate change may have a detrimental effect on a firm's financial performance. Using a forward-looking measure of climate risk exposure based on textual analysis of firms' 10-K reports, we assess whether climate risks---as disclosed to the regulator---are priced in the credit default swap (CDS) market. We construct this novel climate risk measure based on BERT, an advanced language understanding algorithm, and adapt it for our purpose. We differentiate between physical and transition risks and find that transition risk increases CDS spreads, especially after the Paris Climate Agreement of 2015. However, we do not find such an effect for physical risk.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:1 June 2020
Deposited On:03 Jun 2020 05:29
Last Modified:03 Jun 2020 05:30
Series Name:SSRN
OA Status:Green
Free access at:Official URL. An embargo period may apply.
Official URL:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3616324
Other Identification Number:merlin-id:19509

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