Carbon emission and credit default swaps

Zehua Zhang and Ran Zhao

Finance Research Letters, 2022, vol. 50, issue C

Abstract: We examine the effect of carbon emission and the CDS market reactions. The carbon credit risk affects the credit risk of the underlying firm through the policy uncertainty. We document a statistically and economically significant positive relation between scope 1 carbon emission and the single-name CDS premium. The CDS term structure rises with the increase of carbon emission, reflecting a relatively long-term concern on environmental policy implications on the firm’s downside risk. The proposed effect is more pronounced for firms with high financial constraints. The paper contributes to the ongoing asset pricing implications of implementing stricter ESG policies.

Keywords: Carbon emission; CDS spread; CDS slope; Financial constraint (search for similar items in EconPapers)
JEL-codes: G10 G12 G30 G32 M14 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:50:y:2022:i:c:s1544612322004706

DOI: 10.1016/j.frl.2022.103286

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