 Corporate debt value under transition scenario uncertaintyTheo Le Guenedal and Peter Tankov Mathematical Finance, 2025, vol. 35, issue 1, 40-73 Abstract: We develop a structural model for pricing a defaultable bond issued by a company subject to climate transition risk. We assume that the magnitude of the transition risk impacts depends on a transition scenario, which is initially unknown but is progressively revealed through the observation of the carbon tax trajectory. The bond price, credit spread, and optimal default/restructuring thresholds are then expressed as function of the firm's revenue level and the carbon tax. Numerical implementation of the resulting formulas is discussed and illustrated using real data. Our results show that under transition scenario uncertainty, carbon tax adjustments are more likely to trigger a default than when the true scenario is known because after each adjustment, the more environmentally stringent scenario becomes more likely. We also find that faster discovery of scenario information leads to higher credit spreads since better information allows the shareholders to optimize the timing of default, increasing the value of default option and decreasing the bond price. As an extension, we consider the situation where the company may invest into abatement technology, increasing the value of both the share price and the bond price. Date: 2025 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:mathfi:v:35:y:2025:i:1:p:40-73 Ordering information: This journal article can be ordered from Access Statistics for this article Mathematical Finance is currently edited by Jerome Detemple More articles in Mathematical Finance from Wiley Blackwell |
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