Informativeness and Timeliness of 10-K Text Similarity for Predicting Tail-Risk Comovement
48 Pages Posted: 12 Jun 2017 Last revised: 13 Jun 2017
Date Written: May 31, 2017
We measure a bank’s connectedness by constructing a measure of its text similarity with other banks based on 10-K business description and MD&A discussions. We find that tail-risk comovement between a given bank and the banking system is increasing in the bank’s average similarity. We also construct groups of connected peer banks, finding that banks co-move significantly more in the tails with their highest similarity peers. Finally, we separate 10-K text into boilerplate and non-boilerplate components. We find that both boilerplate and non-boilerplate similarity have incremental information about future tail comovement. However, non-boilerplate similarity is significantly timelier than boilerplate, consistent with non-boilerplate similarity capturing commonalities across banks in currently evolving fundamentals and boilerplate similarity capturing commonalities in structural features that evolve slowly over time.
Keywords: Textual analysis, Banking, risk, text similarity, boilerplate disclosure
JEL Classification: M41, G21
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