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Comparison of an affine term structure model with Fed chair speeches in large language models

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  • Ko, Eunmi
  • Dmonte, Alphaeus
  • Zampieri, Marcos

Abstract

We compare the performance of financial sentiment analysis on Fed chair speeches between a domain-specific model (finBERT) and a general-purpose model (flan-T5) with few-shot learning. Specifically, we implement an out-of-sample yield forecast of an affine term structure model using two different sets of sentiment factor values for Fed chair speeches and compare the root mean squared error (RMSE) and the mean absolute deviation (MAD) of the yield forecasts between two sentiment analysis models. The performance of the general-purpose model with few-shot learning seems comparable to the domain-specific model. Considering the computational costs of pre-training and fine-tuning a domain-specific model, it seems cost-efficient to use general-purpose models with few-shot learning for the sentiment analysis of the Fed chair speeches.

Suggested Citation

  • Ko, Eunmi & Dmonte, Alphaeus & Zampieri, Marcos, 2025. "Comparison of an affine term structure model with Fed chair speeches in large language models," Finance Research Letters, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:finlet:v:78:y:2025:i:c:s1544612325003770
    DOI: 10.1016/j.frl.2025.107114
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    References listed on IDEAS

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    1. Eric Fischer & Rebecca McCaughrin & Saketh Prazad & Mark Vandergon, 2023. "Fed Transparency and Policy Expectation Errors: A Text Analysis Approach," Staff Reports 1081, Federal Reserve Bank of New York.
    2. Yuriy Gorodnichenko & Tho Pham & Oleksandr Talavera, 2023. "The Voice of Monetary Policy," American Economic Review, American Economic Association, vol. 113(2), pages 548-584, February.
    3. Hamilton, James D. & Wu, Jing Cynthia, 2012. "Identification and estimation of Gaussian affine term structure models," Journal of Econometrics, Elsevier, vol. 168(2), pages 315-331.
    4. Leombroni, Matteo & Vedolin, Andrea & Venter, Gyuri & Whelan, Paul, 2021. "Central bank communication and the yield curve," Journal of Financial Economics, Elsevier, vol. 141(3), pages 860-880.
    5. Eric T. Swanson, 2023. "The Importance of Fed Chair Speeches as a Monetary Policy Tool," AEA Papers and Proceedings, American Economic Association, vol. 113, pages 394-400, May.
    6. Ko, Eunmi, 2024. "An affine term structure model with Fed chairs’ speeches," Finance Research Letters, Elsevier, vol. 63(C).
    7. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
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    More about this item

    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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