Ask BERT: How Regulatory Disclosure of Transition and Physical Climate Risks affects the CDS Term Structure
Swiss Finance Institute Research Paper No. 21-19
Journal of Financial Econometrics, forthcoming
55 Pages Posted: 15 Jul 2020 Last revised: 6 Jul 2022
Date Written: June 1, 2020
We use BERT, an AI-based algorithm for language understanding, to quantify regulatory climate risk disclosures and analyze their impact on the term structure in the credit default swap (CDS) market. Risk disclosures can either increase or decrease CDS spreads, depending on whether the disclosure reveals new risks or reduces uncertainty. Training BERT to differentiate between transition and physical climate risks, we find that disclosing transition risks increases CDS spreads after the Paris Climate Agreement of 2015, while disclosing physical risks decreases the spreads. In addition, we also find that the election of Trump had a negative impact on CDS spreads for firms exposed to transition risk. These impacts are consistent with theoretical predictions and economically and statistically significant.
Keywords: climate risk disclosure, CDS spreads, 10-K filings, physical risks, transition risks, BERT model.
JEL Classification: G13, G28, M48
Suggested Citation: Suggested Citation