Climate-Related Default Probabilities

Augusto Blanc-Blocquel, Luis Ortiz-Gracia and Simona Sanfelici ()
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Augusto Blanc-Blocquel: Departamento de Finanzas, Facultad de Ciencias Empresariales, Universidad Austral, Paraguay 1950, Rosario 2000, Argentina
Luis Ortiz-Gracia: Departament d’Econometria, Estadística i Economia Aplicada, Universitat de Barcelona (UB), Av. Diagonal, 690, 08034 Barcelona, Spain
Simona Sanfelici: Department of Economics and Management, University of Parma, 43125 Parma, Italy

Risks, 2024, vol. 12, issue 11, 1-19

Abstract: Climate risk refers to the risks associated with climate change and has already started to impact various sectors of the economy. In this work, we focus on the impact of physical risk on the probability of default for a firm in the agribusiness sector. The probability of default is estimated based on the Merton model, where the firm defaults when its asset value falls below the threshold defined by its liabilities. We study the relationship between the stock value of the firm and global surface temperature anomalies, observing that an increase in temperature negatively affects the stock value and, consequently, the asset value of the firm. A decrease in the asset value of the firm translates into an increase in its probability of default. We also propose a model to assess the exposure of the firm to transition risk.

Keywords: climate risk; credit risk; probability of default; Merton model; temperature anomalies; breakpoint; wavelet regression; Haar wavelets (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2024
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