Deep Learning Mutual Fund Disclosure: Risk Sentiment, Risk Taking, and Performance

47 Pages Posted: 18 Apr 2022

See all articles by Sean Cao

Sean Cao

Georgia State University - J. Mack Robinson College of Business

Baozhong Yang

Georgia State University - Robinson College of Business

Alan L. Zhang

Florida International University (FIU)

Date Written: June 27, 2021

Abstract

We use a deep learning model to extract syntactic structures from mutual fund managers’ narrative discussion and construct forward-looking risk sentiment measures. These measures capture the manager’s sentiment and consciousness about the risks facing a mutual fund. Managers with a more negative (positive) risk sentiment are more likely to reduce (increase) their portfolio risk in the subsequent period. Managers who are conscious about negative risk generate superior risk-adjusted return and higher Sharpe ratio, and are more likely to have higher intra-quarter trading skills, measured by return gap. Risk-conscious managers also obtain higher Morningstar ratings and attract greater flows from sophisticated investors, giving incentives to managers to report their risk sentiments. Given their forward-looking nature, our new measures can inform investors and researchers about fund managers’ risk management and investment decisions. Our study also calls for more applications of deep learning models in textual analytics that can reveal and analyze linguistic features previously inaccessible to researchers.

Keywords: Deep Learning, Machine Learning, Mutual Fund, Disclosure, Textual Analysis, Sentiment

JEL Classification: C45, G11, G14, G23

Suggested Citation

Cao, Sean S. and Yang, Baozhong and Zhang, Alan L., Deep Learning Mutual Fund Disclosure: Risk Sentiment, Risk Taking, and Performance (June 27, 2021). Available at SSRN: https://ssrn.com/abstract=4060307 or http://dx.doi.org/10.2139/ssrn.4060307

Sean S. Cao

Georgia State University - J. Mack Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States

Baozhong Yang (Contact Author)

Georgia State University - Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States
404-413-7350 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://sites.google.com/view/baozhongyang/

Alan L. Zhang

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

HOME PAGE: http://www.alanlzhang.com

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