Ask BERT: How Regulatory Disclosure of Transition and Physical Climate Risks affects the CDS Term Structure

81 Pages Posted: 15 Jul 2020 Last revised: 9 Apr 2021

See all articles by Julian F Kölbel

Julian F Kölbel

University of Zurich, Department of Banking and Finance; MIT Sloan

Markus Leippold

University of Zurich - Department of Banking and Finance; University of Zurich - Faculty of Economics, Business Administration and Information Technology

Jordy Rillaerts

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

Qian Wang

University of Zurich - Department of Banking and Finance

Date Written: June 1, 2020

Abstract

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.

Keywords: climate risk disclosure, CDS spreads, 10-K filings, physical risks, transition risks, BERT model

JEL Classification: G13, G28, M48

Suggested Citation

Kölbel, Julian and Leippold, Markus and Rillaerts, Jordy and Wang, Qian, Ask BERT: How Regulatory Disclosure of Transition and Physical Climate Risks affects the CDS Term Structure (June 1, 2020). Swiss Finance Institute Research Paper No. 21-19, Available at SSRN: https://ssrn.com/abstract=3616324 or http://dx.doi.org/10.2139/ssrn.3616324

Julian Kölbel

University of Zurich, Department of Banking and Finance

Schönberggasse 1
Zurich
Switzerland

MIT Sloan ( email )

100 Main Street
Cambridge, MA 02142
United States

Markus Leippold (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Jordy Rillaerts

University of Zurich - Department of Banking and Finance ( email )

Plattenstr 32
Zurich, 8032
Switzerland

HOME PAGE: http://https://www.bf.uzh.ch/en/persons/rillaerts-jordy

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

HOME PAGE: http://https://www.sfi.ch/en/people/jordy-rillaerts

Qian Wang

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

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