The network of firms implied by the news
Hannan Zheng and
No 108, ESRB Working Paper Series from European Systemic Risk Board
We show that the news is a rich source of data on distressed firm links that drive firm-level and aggregate risks. The news tends to report about links in which a less popular firm is distressed and may contaminate a more popular firm. This constitutes a contagion channel that yields predictable returns and downgrades. Shocks to the degree of news-implied firm connectivity predict increases in aggregate volatilities, credit spreads, and default rates, and declines in output. To obtain our results, we propose a machine learning methodology that takes text data as input and outputs a data-implied firm network. JEL Classification: E32, E44, L11, G10, C82
Keywords: contagion; machine learning; natural language processing; networks; predictability; risk measurement (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:srk:srkwps:2020108
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