Carbon default swap – disentangling the exposure to carbon risk through CDS

Blasberg, Alexander, Kiesel, Rüdiger and Taschini, Luca ORCID: 0000-0001-5355-1736 (2023) Carbon default swap – disentangling the exposure to carbon risk through CDS. Grantham Research Institute on Climate Change and the Environment Working Papers (391). Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science, London, UK.

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Abstract

Using Credit Default Swap spreads, we construct a forward-looking, market-implied carbon risk factor and show that carbon risk affects firms’ credit spread. The effect is larger for European than North American firms and varies substantially across industries, suggesting the market recognizes where and which sectors are better positioned for a transition to a low-carbon economy. Moreover, lenders demand more credit protection for those borrowers perceived to be more exposed to carbon risk when market-wide concern about climate change risk is elevated. Lenders expect that adjustments in carbon regulations in Europe will cause relatively larger policy-related costs in the near future.

Item Type:	Monograph (Working Paper)
Official URL:	https://www.lse.ac.uk/granthaminstitute/publicatio...
Additional Information:	© 2023 The Authors
Divisions:	Grantham Research Institute
Subjects:	G Geography. Anthropology. Recreation > GE Environmental Sciences H Social Sciences > HB Economic Theory H Social Sciences > HD Industries. Land use. Labor
JEL classification:	C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C21 - Cross-Sectional Models; Spatial Models; Treatment Effect Models C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C23 - Models with Panel Data G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q54 - Climate; Natural Disasters
Date Deposited:	01 Feb 2023 15:24
Last Modified:	14 Sep 2024 04:23
URI:	http://eprints.lse.ac.uk/id/eprint/118096

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