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Integrating Climate Risks into Structural Default Risk Models : Reviewing PGGM's Corporate Bond Portfolio

Maneschijn, D.G.J.C. (2025) Integrating Climate Risks into Structural Default Risk Models : Reviewing PGGM's Corporate Bond Portfolio.

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Abstract:This research focuses the integration of climate risks into structural default risk models, addressing the needs of academics, regulators, and financial institutions to better quantify the impact of climate risks on firm default risk. As climate risks can lead to financial issues such as asset devaluation and increased operational costs, advancements are needed in this novel field. Existing studies mainly focus on empirically demonstrating the relationship between climate risks and default risk, often ignoring the mechanisms involved. This research bridges this gap by incorporating climate risks into structural default risk models, which treat default endogenously. The study's contributions are twofold. First, it introduces a novel methodology adapting the asset value channel of the Merton jump diffusion model to integrate climate risks, validated through a case study using PGGM's corporate bond portfolio. The model's behaviour aligns with economic theory, indicating its suitability for quantifying climate risks. Second, the case study reveals a relatively small average impact of climate risks on default risk, however, significant shocks are observed in fast-transitioning scenarios. Data limitations may lead to an underestimation of climate risks. This research enhances financial risk management for asset managers, potentially leading to improved asset allocation by providing climate-integrated insights into default risk.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:31 mathematics, 83 economics
Programme:Industrial Engineering and Management MSc (60029)
Link to this item:https://purl.utwente.nl/essays/106079
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