Macquarie University
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Empirical Essays on Carbon Risk Management, Bond Short Selling and their Respective Impact on CDS Spread

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posted on 2024-06-20, 22:08 authored by Saurabh Trivedi

This dissertation empirically examines two novel research issues: firm-level carbon risk management and corporate bond short selling.

The first essay (Chapter 2) develops a firm-level carbon risk management score (CRMS) to evaluate corporate practices around carbon risk mitigation. The indicators for CRMS are extracted from a wider set of environmental risk management indicators and capture preparedness through carbon risk mitigation policies and systems, as well as performance metrics like historical carbon emission relative to its industry peers. Regression analyses show CRMS conveys additional information beyond existing climate exposure measures, suggesting it provides a novel assessment of corporate transition risk management. The chapter thus presents a novel metric focusing on carbon risk management indicators, helping investors identify firms proactively transitioning their existing carbon-intensive business models to a low-carbon business model.

The second essay (Chapter 3) investigates how firms’ carbon risk management practices (studied in Chapter 2) influence market assessment of their credit risk. While the effects of carbon emission risks on firm performance are understood, there is little evidence of the benefits of firms’ proactive management of carbon emission risk. Using two quasi-exogenous events involving the 2015 Paris Climate Agreement and the staggered implementation of US state climate adaptation plans, we find that stronger carbon risk management is associated with significantly lower credit default swap (CDS) spreads. Our results are not driven by firm-level climate exposures, leverage, and social, governance, or distress risks. Firms with better carbon risk management also exhibit lower subsequent carbon  emissions. Overall, this essay highlights the importance of carbon risk management in mitigating credit risk.

The third essay examines the information flows from short sellers in the corporate bond markets to the credit default swap markets by examining the relationship between short-selling activity in the bond market and subsequent CDS spreads. While extant literature provides evidence on the information role of the CDS market for price formation in corporate bonds, we show that firm-level bond short interest is positively related to the one-month ahead CDS spreads. This finding is robust to alternative measurements or estimation methods, controlling for the influence of equity short interest and put options trading volume. The relationship between bond short interest and CDS spread is present mainly in firms with higher short-selling fees or where firm-level CDS contracts are more liquid. Firms with higher bond short-selling activities have higher credit risk profiles, as indicated by higher leverage, higher idiosyncratic volatility, lower firm performance, and higher financing costs. Overall, this essay shows the significance of the information provided by bond short sellers for cross-market assets such as CDSs.

In summary, this thesis offers significant original insights that advance comprehension of climate finance, climate risk management, credit derivative markets, and the informational value of short sellers for cross-asset markets. These are crucial topics relevant to the academic community and industry professionals.


Table of Contents

Chapter 1: Introduction and Overview -- Chapter 2: Firm Level Carbon Risk Management -- Chapter 3: Do Firms Benefit from Carbon Risk Management? Evidence from the Credit Default Swaps Market -- Chapter 4: Bond Short Selling and CDS Spread -- Chapter 5: Conclusion -- References

Awarding Institution

Macquarie University

Degree Type

Thesis PhD


Doctor of Philosophy

Department, Centre or School

Department of Applied Finance

Year of Award


Principal Supervisor

Thomas Smith

Additional Supervisor 1

Jianlei Han


Copyright: The Author Copyright disclaimer:




191 pages

Former Identifiers

AMIS ID: 353427