Review of Corporate Finance > Vol 4 > Issue 1–2

Pricing Transition Risk with a Jump-Diffusion Credit Risk Model: Evidences from the CDS market

Giulia Livieri, The London School of Economics and Political Science, UK, , Davide Radi, Department of Mathematics for Economic, Financial and Actuarial Sciences, Catholic University of Sacred Heart, Italy, , Elia Smaniotto, Department of Economics, University of Verona, Italy,
Suggested Citation
Giulia Livieri, Davide Radi and Elia Smaniotto (2024), "Pricing Transition Risk with a Jump-Diffusion Credit Risk Model: Evidences from the CDS market", Review of Corporate Finance: Vol. 4: No. 1–2, pp 177-201.

Publication Date: 18 Apr 2024
© 2024 G. Livieri, D. Radi and E. Smaniotto
Derivatives,  Asset pricing,  Panel data,  Hypothesis testing,  Climate change
JEL Codes: G32, C32, C21, Q54
Climate changeTransition riskCDS spreadsSustainable financeCredit risk


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In this article:
The Model 
Pricing Defaultable Coupon Bonds and Credit Default Swaps 
Research Design, Dataset and Methodology 
Empirical Investigation and Results 


Transition risk can be defined as the business-risk related to the enactment of green policies, aimed at driving the society towards a sustainable and low-carbon economy. In particular, when new green laws are released, companies are forced to comply with the new standards, incurring in costs which can undermine their financial stability. In this paper we derive formulas for the pricing of defaultable coupon bonds and Credit Default Swaps to empirically demonstrate that a jump-diffusion credit risk model in which the downward jumps in the firm value are due to tighter green laws can capture, at least partially, the transition risk. The empirical investigation consists in the model calibration on the CDS term-structure, performing a quantile regression to assess the relationship between implied prices and a proxy of the transition risk. Additionally, we show that a model without jumps lacks this property, confirming the jump-like nature of the transition risk.



Review of Corporate Finance, Volume 4, Issue 1–2 Special Issue on Sustainable and Climate Finance: Articles Overiew
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