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Ask BERT: How Regulatory Disclosure of Transition and Physical Climate Risks affects the CDS Term Structure

Author

Listed:
  • Julian F Kölbel

    (University of Zurich, Department of Banking and Finance; MIT Sloan)

  • Markus Leippold

    (University of Zurich - Department of Banking and Finance; University of Zurich - Faculty of Economics, Business Administration and Information Technology)

  • Jordy Rillaerts

    (University of Zurich - Department of Banking and Finance; Swiss Finance Institute)

  • Qian Wang

    (University of Zurich - Department of Banking and Finance)

Abstract

We use BERT, an AI-based algorithm for language understanding, to decipher regulatory climate-risk disclosures and measure their impact on the credit default swap (CDS) market. Risk disclosures can either increase or decrease credit spreads, depending on whether disclosure reveals new risks or sharpens the signal and decreases the uncertainty. Training BERT to differentiate between transition and physical climate risks, we find that disclosing transition risks increases CDS spreads, especially after the Paris Climate Agreement of 2015, while disclosing physical climate risks leads to a decrease in CDS spreads. These impacts are statistically and economically highly significant.

Suggested Citation

  • Julian F Kölbel & Markus Leippold & Jordy Rillaerts & Qian Wang, 2021. "Ask BERT: How Regulatory Disclosure of Transition and Physical Climate Risks affects the CDS Term Structure," Swiss Finance Institute Research Paper Series 21-19, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2119
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3616324
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    Cited by:

    1. Bingler, Julia Anna & Kraus, Mathias & Leippold, Markus & Webersinke, Nicolas, 2022. "Cheap talk and cherry-picking: What ClimateBert has to say on corporate climate risk disclosures," Finance Research Letters, Elsevier, vol. 47(PB).
    2. Nguyen, Quyen & Diaz-Rainey, Ivan & Kuruppuarachchi, Duminda, 2023. "In search of climate distress risk," International Review of Financial Analysis, Elsevier, vol. 85(C).

    More about this item

    Keywords

    climate risk disclosure; CDS spreads; 10-K filings; physical risks; transition risks; BERT model;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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