Climate-related transition risk in the European CDS market

78 Pages Posted: 13 Apr 2022

See all articles by Katia Vozian

Katia Vozian

Hanken School of Economics; European Central Bank (ECB); University of Helsinki - Helsinki Graduate School of Economics; Leibniz Institute for Financial Research SAFE

Date Written: February 14, 2022

Abstract

The European low-carbon transition started in the last decades and is accelerating to reach net-zero by 2050. I study how the climate-related transition risk of a European large corporate firm relates to its CDS-implied credit risk for different time horizons. I find that firms with higher GHG emissions have higher CDS-implied credit risk, even at the 30-year horizon, particularly after the 2015 Paris Agreement. The results suggest that the European CDS market is already pricing to some extent the exposure to transition risk of a firm at different time horizons, but ignores a firm’s transition risk management efforts and its exposure to the EU ETS.

Keywords: climate change; transition risk; credit risk; credit default swap (CDS); emissions trading system (ETS)

JEL Classification: E58, G11, G32, Q51, Q56, C58

Suggested Citation

Vozian, Katia, Climate-related transition risk in the European CDS market (February 14, 2022). Available at SSRN: https://ssrn.com/abstract=4072769 or http://dx.doi.org/10.2139/ssrn.4072769

Katia Vozian (Contact Author)

Hanken School of Economics ( email )

PB 287
Helsinki, Helsinki 65101
Finland

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

University of Helsinki - Helsinki Graduate School of Economics

P.O. Box 17 (Arkadiankatu 7)
Helsinki, FI00014
Finland

Leibniz Institute for Financial Research SAFE

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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