 A finance approach to climate stress testingHenk Jan Reinders, Dirk Schoenmaker and Mathijs van Dijk Journal of International Money and Finance, 2023, vol. 131, issue C Abstract: There is increasing interest in assessing the impact of climate policies on the value of financial sector assets, and consequently on financial stability. Prior studies either take a “black box” macro-financial approach or focus solely on equity instruments – though banks’ exposures predominantly consist of debt. We develop a more tractable finance (valuation) approach at the industry-level and use a Merton contingent claims model to assess the impact of a carbon tax shock on the market value of equity and debt instruments. We calibrate our model using detailed firm level vulnerability data and apply the model to 2-digit sectoral exposures of Dutch banks. We find declines in the market value of banks’ assets of 2–13% of core capital for a €100 carbon tax shock, increasing to 6–29% for a €200 carbon tax shock. Keywords: climate stress test; financial stability; carbon tax; banks; debt exposures; Merton model (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:131:y:2023:i:c:s0261560622002005 DOI: 10.1016/j.jimonfin.2022.102797 Access Statistics for this article Journal of International Money and Finance is currently edited by J. R. Lothian More articles in Journal of International Money and Finance from Elsevier |
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