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Carbon emission and credit default swaps

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  • Zhang, Zehua
  • Zhao, Ran

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.

Suggested Citation

  • Zhang, Zehua & Zhao, Ran, 2022. "Carbon emission and credit default swaps," Finance Research Letters, Elsevier, vol. 50(C).
    • Handle: RePEc:eee:finlet:v:50:y:2022:i:c:s1544612322004706
    DOI: 10.1016/j.frl.2022.103286
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    Cited by:

    1. Alexander Blasberg & Rüdiger Kiesel & Luca Taschini, 2022. "Carbon Default Swap - Disentangling the Exposure to Carbon Risk through CDS," CESifo Working Paper Series 10016, CESifo.
    2. Blasberg, Alexander & Kiesel, Rüdiger & Taschini, Luca, 2023. "Carbon default swap – disentangling the exposure to carbon risk through CDS," LSE Research Online Documents on Economics 118096, London School of Economics and Political Science, LSE Library.
    3. Giulia Livieri & Davide Radi & Elia Smaniotto, 2023. "Pricing Transition Risk with a Jump-Diffusion Credit Risk Model: Evidences from the CDS market," Papers 2303.12483, arXiv.org.
    4. Blasberg, Alexander & Kiesel, Rüdiger & Taschini, Luca, 2023. "Carbon default swap – disentangling the exposure to carbon risk through CDS," LSE Research Online Documents on Economics 118092, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    Carbon emission; CDS spread; CDS slope; Financial constraint;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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