Dynamic Interpretation of Emerging Risks in the Financial Sector

Forthcoming Review of Financial Studies

77 Pages Posted: 11 Jun 2016 Last revised: 21 Mar 2019

See all articles by Kathleen Weiss Hanley

Kathleen Weiss Hanley

Lehigh University - College of Business & Economics

Gerard Hoberg

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Date Written: February 28, 2018

Abstract

We use computational linguistics to develop a dynamic, interpretable methodology that can detect emerging risks in the financial sector. Our model can predict heightened risk exposures as early as mid 2005, well in advance of the 2008 financial crisis. Risks related to real estate, prepayment, and commercial paper are elevated. Individual bank exposure strongly predicts returns, bank failure and return volatility. We also document a rise in market instability since 2014 related to sources of funding and mergers and acquisitions. Overall, our model predicts the build-up of emerging risk in the financial system and bank-specific exposures in a timely fashion.

Keywords: Emerging Risk, Bank, Financial Institutions, Financial Crisis, Computational Linguistics, Text Analytics, Failure

JEL Classification: G21, G28, E66

Suggested Citation

Hanley, Kathleen Weiss and Hoberg, Gerard, Dynamic Interpretation of Emerging Risks in the Financial Sector (February 28, 2018). Forthcoming Review of Financial Studies. Available at SSRN: https://ssrn.com/abstract=2792943 or http://dx.doi.org/10.2139/ssrn.2792943

Kathleen Weiss Hanley (Contact Author)

Lehigh University - College of Business & Economics ( email )

Bethlehem, PA 18015
United States

Gerard Hoberg

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~hoberg/

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