Shocks to Transition Risk

32 Pages Posted: 19 Aug 2020

See all articles by Christoph Meinerding

Christoph Meinerding

Deutsche Bundesbank

Yves Stephan Schüler

Deutsche Bundesbank

Philipp Zhang

University of Zurich - Department of Economics

Date Written: July 17, 2020

Abstract

We propose and implement a method to identify shocks to transition risk. We identify transition risk shocks as instances where a strong differential valuation of green versus brown firms coincides with significant information on climate change. For that purpose, we combine information from long-short equity portfolios sorted on firms' carbon footprints with information from textual analysis of newspaper archives. We find that shocks increasing transition risk (negative abnormal returns of brown firms) induce a decline in aggregate and sectoral industrial production. Moreover, they significantly affect financial stability, as measured by the excess bond premium or credit conditions more generally. Finally, we document a pronounced asymmetry in the economy's response to shocks increasing or decreasing transition risk.

Keywords: transition risk, climate change, financial stability, portfolio sort, textual analysis

JEL Classification: C30, E44, G12, Q43, Q54, Q58

Suggested Citation

Meinerding, Christoph and Schüler, Yves Stephan and Zhang, Philipp, Shocks to Transition Risk (July 17, 2020). Available at SSRN: https://ssrn.com/abstract=3654155 or http://dx.doi.org/10.2139/ssrn.3654155

Christoph Meinerding

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Yves Stephan Schüler (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Philipp Zhang

University of Zurich - Department of Economics ( email )

Zurich
Switzerland

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