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

Journal of Financial Econometrics, 2024, vol. 22, issue 1, 30-69

Abstract: We use BERT, an AI-based algorithm for language understanding, to quantify regulatory climate risk disclosures and analyze their impact on the term structure in the credit default swap (CDS) market. Risk disclosures can either increase or decrease CDS spreads, depending on whether the disclosure reveals new risks or reduces uncertainty. Training BERT to differentiate between transition and physical climate risks, we find that disclosing transition risks increases CDS spreads after the Paris Climate Agreement of 2015, while disclosing physical risks decreases the spreads. In addition, we also find that the election of Trump had a negative impact on CDS spreads for firms exposed to transition risk. These impacts are consistent with theoretical predictions and economically and statistically 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)
Date: 2024
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Citations: View citations in EconPapers (3)

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