ESRB Paper Shows News as Information Source on Distressed Firm Links
ESRB publishes a working paper that shows the news as a rich source of data on distressed firm links that drive firm-level and aggregate risks. The authors developed a machine learning methodology that takes text data as input and outputs a data-implied firm network. 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, default rates, and declines in output. The results of this paper enable the estimation of accurate measures of firm-level and aggregate risks.
The news-implied networks include a vast majority of links recorded in the currently available data sets. In contrast to the currently available networks, however, news-implied networks capture a wider range of firms and links and are available in high frequencies. On an aggregate level, the authors show that news-implied firm networks capture information about contagion and uncertainty effects that drive aggregate outcomes. The first set of results shows that demand-side considerations incite the news to report about firm links that actively transmit risks across firms and lead to contagion. The next set of results shows that the information contained in news-implied firm networks is highly predictive of aggregate outcomes. Finally, the results show that news-implied firm networks capture information that is not contained in alternative networks. All in one, the results of this paper enable the estimation of accurate measures of firm-level and aggregate risks.
Related Link: Working Paper (PDF)
Keywords: Europe, EU, Banking, Securities, Research, Technology, Machine Learning, Fintech, Natural Language Processing, Risk Measurement, Sentiment Analysis, ESRB
Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.