Does the CDS Market Reflect Regulatory Climate Risk Disclosures?
By Julian F. Kölbel, Markus Leippold, J. Rillaerts, Qian Wang. Social Science Research Network, 2020
129 citations recorded by the source corpus.
We use BERT, an AI-based algorithm for language understanding, to decipher regulatory climate-risk disclosures and measure their impact on the credit default swap (CDS) market. Risk disclosures can either increase or decrease credit spreads, depending on whether disclosure reveals new risks or sharpens the signal and decreases the uncertainty. Training BERT to differentiate between transition and physical climate risks, we find that disclosing transition risks increases CDS spreads, especially after the Paris Climate Agreement of 2015, while disclosing physical climate risks leads to a decrease in CDS spreads. These impacts are statistically and economically highly significant.
Subfields: Accounting, Finance
View Paper: https://www.semanticscholar.org/paper/bbc6486ad37365b77b9d0de8894f595d70af49ac
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Citations in the corpus
- Dissecting Climate Risks: Are they Reflected in Stock Prices? (2021, background): “Pastor et al. (2021) also document that stocks of green firms outperform those of brown firms when concerns about climate change increase.”