When the Scenario Outlives the Bond: Measuring Horizon Bias in Climate Credit Stress Tests

Abstract

Climate stress tests translate scenario paths into portfolio losses, but the scenario horizon can outlive the instruments being stressed. This paper isolates one implementation choice: whether sector-level shocks are censored at each security's contractual exit. The frozen universe contains 822 Chinese interbank medium-term notes issued by 116 listed legal entities and outstanding at year-end 2025. Holding the NGFS CLIMACRED path, legalissuer mapping, and portfolio weights fixed, a horizon-blind maximum-loss rule exceeds its maturity-aware counterpart by 0.081–0.253 percentage points across three short-term scenarios. The gap is concentrated in bonds exiting within two years, remains positive in all 5,000 issuer resamples and leave-one-issuer-out exercises, survives a conservative sectorremapping envelope, and can reorder sector rankings. Mean and cumulative variants preserve the positive maximum-loss direction. A terminal-year statistic, which compares different calendar years, is positive in two scenarios and negative in DIRE; the set-inclusion property guaranteeing a non-negative maximum-loss gap does not extend to that statistic. Legalmaturity and first-call variants form a separate modeling margin. For regulators, the result shows why runoff and reinvestment conventions should be explicit in climate stress WHEN THE SCENARIO OUTLIVES THE BOND templates. This is a measurement contrast, not a forecast, causal estimate, realized loss, or claim about market mispricing.

Author abstract from the research manuscript. Typography and line breaks have been normalized; the linked source may show a different manuscript version.