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Climate-Related Default Probabilities

Author

Listed:
  • Augusto Blanc-Blocquel

    (Departamento de Finanzas, Facultad de Ciencias Empresariales, Universidad Austral, Paraguay 1950, Rosario 2000, Argentina
    Departament d’Estadística i Investigació Operativa, Universitat Politècnica de Catalunya, 08034 Barcelona, Spain)

  • Luis Ortiz-Gracia

    (Departament d’Econometria, Estadística i Economia Aplicada, Universitat de Barcelona (UB), Av. Diagonal, 690, 08034 Barcelona, Spain
    RISKcenter, Institut de Recerca en Economia Aplicada (IREA), Universitat de Barcelona (UB), Av. Diagonal, 690, 08034 Barcelona, Spain)

  • Simona Sanfelici

    (Department of Economics and Management, University of Parma, 43125 Parma, Italy
    Member of the INdAM Research Group GNCS, 00185 Rome, Italy.)

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.

Suggested Citation

  • Augusto Blanc-Blocquel & Luis Ortiz-Gracia & Simona Sanfelici, 2024. "Climate-Related Default Probabilities," Risks, MDPI, vol. 12(11), pages 1-19, November.
    • Handle: RePEc:gam:jrisks:v:12:y:2024:i:11:p:181-:d:1520797
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    References listed on IDEAS

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    3. Darwin Choi & Zhenyu Gao & Wenxi Jiang, 2020. "Attention to Global Warming," The Review of Financial Studies, Society for Financial Studies, vol. 33(3), pages 1112-1145.
    4. Alexander J. McNeil & Rüdiger Frey & Paul Embrechts, 2015. "Quantitative Risk Management: Concepts, Techniques and Tools Revised edition," Economics Books, Princeton University Press, edition 2, number 10496.
    Full references (including those not matched with items on IDEAS)

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