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The network of firms implied by the news

Author

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  • Zheng, Hannan
  • Schwenkler, Gustavo

Abstract

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

Suggested Citation

  • Zheng, Hannan & Schwenkler, Gustavo, 2020. "The network of firms implied by the news," ESRB Working Paper Series 108, European Systemic Risk Board.
    • Handle: RePEc:srk:srkwps:2020108
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    More about this item

    Keywords

    contagion; machine learning; natural language processing; networks; predictability; risk measurement;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access

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