Skip to main content
SpringerLink
Log in

Climate Risk in Structural Credit Models

  • Chapter
  • First Online:
Quantitative Energy Finance

  • 154 Accesses

Abstract

This survey article reviews the current state of literature on how structural models of credit risk are employed to model the impact of climate risk on financial markets. We discuss how the two prominent types of climate risk, physical and transition risk, are captured by the seminal Merton model and its well-known extensions. Theoretical and practical advantages and drawbacks are worked out and an outlook on possible model improvements is provided.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 99.00
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Hardcover Book
USD 129.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    Equation (5) is obtained by applying Itô’s formula to obtain the stock price dynamics.

  2. 2.

    An alternative is to use the double-exponential distribution advocated by Kou and Wang [22].

  3. 3.

    These models build on [25] and require the calculation of various functionals of Brownian motion.

  4. 4.

    The distance-to-default is a measure based on the relation of the value process and the default boundary and widely used in variants of the Merton model, see [19] for further discussion.

  5. 5.

    Using the EBITDA relies on the assumption that the proportionality to the firm value stays constant over time.

References

  1. Rajhi, W., Albuquerque, P.: Banking stability, natural disasters, and political conflicts: time series evidence on causality in developing countries. Economics Discussion Papers (2017)

    Google Scholar 

  2. Kölbel, J., Leippold, M., Rillaerts, J., Wang, Q. Ask BERT: How Regulatory Disclosure of Transition and Physical Climate Risks affects the CDS Term Structure. J. Financ. Econ. Forthcoming (2022)

    Google Scholar 

  3. Bats, J., Bua, G., Kapp, D.: Physical and transition risk premiums in Euro area corporate bond markets. SSRN (2023)

    Google Scholar 

  4. Kleimeier, S., Viehs, M.: Carbon disclosure, emission levels, and the cost of debt. SSRN (2018)

    Google Scholar 

  5. Jung, J., Herbohn, K., Clarkson, P.: Carbon risk, carbon risk awareness and the cost of debt financing. J. Bus. Ethics 150(4), 1151–1171 (2018)

    Article  Google Scholar 

  6. Delis, M., de Greiff, K., Ongena, S.: Being stranded on the carbon bubble? Climate policy risk and the pricing of bank loans. Swiss Finance Institute Research Paper Series (2018)

    Google Scholar 

  7. Duan, T., Li, F.W., Wen, Q. Is Carbon Risk Priced in the Cross-Section of Corporate Bond Returns?. J. Financ. Quant. Anal. 1–35 (2023)

    Google Scholar 

  8. Seltzer, L., Starks, L.T., Zhu, Q.: Climate regulatory risks and corporate bonds. SSRN (2022)

    Google Scholar 

  9. Capasso, G., Gianfrate, G., Spinelli, M.: Climate change and credit risk. J. Clean. Product. 266, 121634 (2020)

    Article  Google Scholar 

  10. Ilhan, E., Sautner, Z., Vilkov, G.: Carbon tail risk. Rev. Financ. Stud. 34(3), 1540–1571 (2020)

    Article  Google Scholar 

  11. Barth, F., Hübel, B., Scholz, H.: ESG and corporate credit spreads. J. Risk Financ. 23(2), 169–190 (2022)

    Article  Google Scholar 

  12. Christ, J., Hertel, T., Zhao, R.: Corporate sustainability performance and the cost of debt – an analysis of the impact of country- and industry-specific climate risk exposures. SSRN (2022)

    Google Scholar 

  13. Blasberg, A., Kiesel, R., Taschini, L.: Carbon default swap – disentangling the exposure to carbon risk through CDS. SSRN (2022)

    Google Scholar 

  14. Bouchet, V., Le Guenedal, T.: Credit risk sensitivity to carbon price. SSRN (2020)

    Google Scholar 

  15. Reinders, H.J., Schoenmaker, D., van Dijk, M.: A finance approach to climate stress testing. J. Int. Money Financ. 131, 102797 (2023)

    Article  Google Scholar 

  16. Agliardi, E., Agliardi, R.: Pricing climate-related risks in the bond market. J. Financ. Stabil. 54, 100868 (2021)

    Article  Google Scholar 

  17. Le Guenedal, T., Tankov, P.: Corporate debt value under transition scenario uncertainty. SSRN (2020)

    Google Scholar 

  18. Bielecki, T.R., Rutkowski, M.: Credit Risk: Modeling, Valuation and Hedging. Springer Finance. Springer, Berlin (2004)

    Google Scholar 

  19. Lando, D.: Credit Risk Modeling. Princeton University Press, Princeton (2004)

    Book  Google Scholar 

  20. Merton, R.: On the pricing of corporate debt: the risk structure of interest rates. J. Financ. 29(2), 449–470 (1974)

    Google Scholar 

  21. Zhou, C.: The term structure of credit spreads with jump risk. J. Bank. Financ. 25(11), 2015–2040 (2001)

    Article  Google Scholar 

  22. Kou, S., Wang, H.: Option pricing under a double exponential jump diffusion model. Manag. Sci. 50(9), 1178–1192 (2004)

    Article  Google Scholar 

  23. Leland, H.E.: Corporate debt value, bond covenants, and optimal capital structure. J. Financ. 49(4), 1213–1252 (1994)

    Article  Google Scholar 

  24. Leland, H.E., Toft, K.B.: Optimal capital structure, endogenous bankruptcy, and the term structure of credit spreads. J. Financ. 51(3), 987–1019 (1996)

    Article  Google Scholar 

  25. Black, F., Cox, J.C.: Valuing corporate securities: some effects of bond indenture provisions. J. Financ. 31(2), 351–367 (1976)

    Article  Google Scholar 

  26. Sautner, Z., Van Lent, L., Vilkov, G., Zhang, R.: Firm-level climate change exposure. J. Financ. 78(3), 1449–1498 (2023)

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. University of Duisburg-Essen, Essen, Germany

    Alexander Blasberg & Rüdiger Kiesel

Authors
  1. Alexander Blasberg
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Rüdiger Kiesel
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Alexander Blasberg .

Editor information

Editors and Affiliations

  1. Department of Mathematics, University of Oslo, Oslo, Norway

    Fred Espen Benth

  2. Department of Mathematics, Imperial College London, London, UK

    Almut E. D. Veraart

Rights and permissions

Reprints and permissions

Copyright information

© 2024 The Author(s), under exclusive license to Springer Nature Switzerland AG

About this chapter

Check for updates. Verify currency and authenticity via CrossMark

Cite this chapter

Blasberg, A., Kiesel, R. (2024). Climate Risk in Structural Credit Models. In: Benth, F.E., Veraart, A.E.D. (eds) Quantitative Energy Finance. Springer, Cham. https://doi.org/10.1007/978-3-031-50597-3_7

Download citation

Publish with us

Policies and ethics

Search

Navigation