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- Title
Ask BERT: How Regulatory Disclosure of Transition and Physical Climate Risks Affects the CDS Term Structure*.
- Authors
Kölbel, Julian F; Leippold, Markus; Rillaerts, Jordy; Wang, Qian
- 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.
- Subjects
TRUMP, Donald, 1946-; CREDIT default swaps; PARIS Agreement (2016); LANGUAGE models; ARTIFICIAL intelligence; RISK communication; DISCLOSURE
- Publication
Journal of Financial Econometrics, 2024, Vol 22, Issue 1, p30
- ISSN
1479-8409
- Publication type
Article
- DOI
10.1093/jjfinec/nbac027