Is Climate Transition Risk Priced into Corporate Credit Risk? Evidence from Credit Default Swaps

Authors

Andrea Ugolini, Department of Economics, Management and Statistics, University of Milano-BicoccaFollow
Juan Carlos Reboredo, Universidade de Santiago de Compostela, Department of Economics, ECOBAS Research CenterFollow
Javier Ojea-Ferreiro, Bank of CanadaFollow

Date of This Version

2-22-2023

Abstract

We study whether climate transition risk is reflected in the credit default swap (CDS) spreads of firms. Using 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.

Recommended Citation

Ugolini, Andrea; Reboredo, Juan Carlos; and Ojea-Ferreiro, Javier, "Is Climate Transition Risk Priced into Corporate Credit Risk? Evidence from Credit Default Swaps" (February 22, 2023). Fondazione Eni Enrico Mattei Working Papers. Paper 1405.
https://services.bepress.com/feem/paper1405