Market-implied time to transition to a low-carbon economy: a stochastic modelling and inference framework

Battle Count: 82

The paper is primarily a theoretical/statistical inference contribution to climate finance rather than a direct trading strategy paper. However, the market-implied TtT concept and regime-switching framework could inform green bond trading strategies, transition risk hedging, and ESG portfolio construction. The identification of competing transition deadlines and their probability masses could be used for relative value trading in green vs. brown bonds. The framework is more relevant to risk management and policy monitoring than to high-frequency or algorithmic trading.

High complexity due to: (1) Gaussian bridge likelihood computation with time-varying coefficients; (2) Modified Baum-Welch forward-backward recursions for regime-switching bridges; (3) Mn-contrast estimation under fixed-horizon n-infill asymptotics; (4) Parametric bootstrap for standard errors; (5) Sequential model updating strategy; (6) Multiple parameter blocks per regime with structural time points. Requires strong background in stochastic processes, HMMs, and numerical optimization.

The paper provides detailed mathematical derivations, parameter tables, and specifies data sources (Bloomberg terminal, German twin bonds with ISINs). However, no code repository is mentioned. The empirical analysis uses publicly available Bloomberg data but requires a subscription. The theoretical proofs are fully provided in appendices. Reproducibility is moderate due to the complexity of the Baum-Welch implementation and bootstrap procedures.