Is Climate Transition Risk Priced Into Corporate Credit Risk? Evidence From Credit Default Swaps

37 Pages Posted: 23 Jan 2023

See all articles by Andrea Ugolini

Andrea Ugolini

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS)

Juan C. Reboredo

Universidade de Santiago de Compostela - Faculty of Economic Science and Business Studies

Javier Ojea Ferreiro

European Central Bank (ECB); Universidad Complutense de Madrid (UCM)

Date Written: January 20, 2023

Abstract

We study whether climate transition risk is reflected in the credit default swap (CDS) spreads of firms. Using the information on the vulnerability of a firm’s value to the transition to a low carbon economy, we construct a climate transition risk (CTR) factor, and document how this factor shifts the term structure of the CDS spreads of more vulnerable firms but not of less vulnerable firms. Considering the impact of different climate transition policies on the CTR factor, we find that they have asymmetric and significant economic impacts on the credit risk of more vulnerable firms and negligible effects on the remaining firms.

Keywords: Climate transition risk, CDS spreads, credit risk

JEL Classification: C24; G12; G32; Q54

Suggested Citation

Ugolini, Andrea and Reboredo, Juan C. and Ojea Ferreiro, Javier, Is Climate Transition Risk Priced Into Corporate Credit Risk? Evidence From Credit Default Swaps (January 20, 2023). University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 509, Available at SSRN: https://ssrn.com/abstract=4331768

Andrea Ugolini (Contact Author)

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Juan C. Reboredo

Universidade de Santiago de Compostela - Faculty of Economic Science and Business Studies ( email )

Avda. Juan XXIII s/n
Santiago, A Coruña 15704
Spain

Javier Ojea Ferreiro

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Universidad Complutense de Madrid (UCM)

Carretera de Humera s/n
Madrid, Madrid 28223
Spain

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