Ask BERT: How Regulatory Disclosure of Transition and Physical Climate Risks affects the CDS Term Structure

Julian F Kölbel, Markus Leippold, Jordy Rillaerts and Qian Wang
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Julian F Kölbel: University of Zurich, Department of Banking and Finance; MIT Sloan
Markus Leippold: University of Zurich - Department of Banking and Finance; University of Zurich - Faculty of Economics, Business Administration and Information Technology
Jordy Rillaerts: University of Zurich - Department of Banking and Finance; Swiss Finance Institute
Qian Wang: University of Zurich - Department of Banking and Finance

No 21-19, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We use BERT, an AI-based algorithm for language understanding, to decipher regulatory climate-risk disclosures and measure their impact on the credit default swap (CDS) market. Risk disclosures can either increase or decrease credit spreads, depending on whether disclosure reveals new risks or sharpens the signal and decreases the uncertainty. Training BERT to differentiate between transition and physical climate risks, we find that disclosing transition risks increases CDS spreads, especially after the Paris Climate Agreement of 2015, while disclosing physical climate risks leads to a decrease in CDS spreads. These impacts are statistically and economically highly significant.

Keywords: climate risk disclosure; CDS spreads; 10-K filings; physical risks; transition risks; BERT model (search for similar items in EconPapers)
JEL-codes: G13 G28 M48 (search for similar items in EconPapers)
Pages: 81 pages
Date: 2021-03
New Economics Papers: this item is included in nep-ene and nep-env
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2119

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