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Why Bonds Fail Differently? Explainable Multimodal Learning for Multi-Class Default Prediction

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Listed:
  • Yi Lu
  • Aifan Ling
  • Chaoqun Wang
  • Yaxin Xu

Abstract

In recent years, China's bond market has seen a surge in defaults amid regulatory reforms and macroeconomic volatility. Traditional machine learning models struggle to capture financial data's irregularity and temporal dependencies, while most deep learning models lack interpretability-critical for financial decision-making. To tackle these issues, we propose EMDLOT (Explainable Multimodal Deep Learning for Time-series), a novel framework for multi-class bond default prediction. EMDLOT integrates numerical time-series (financial/macroeconomic indicators) and unstructured textual data (bond prospectuses), uses Time-Aware LSTM to handle irregular sequences, and adopts soft clustering and multi-level attention to boost interpretability. Experiments on 1994 Chinese firms (2015-2024) show EMDLOT outperforms traditional (e.g., XGBoost) and deep learning (e.g., LSTM) benchmarks in recall, F1-score, and mAP, especially in identifying default/extended firms. Ablation studies validate each component's value, and attention analyses reveal economically intuitive default drivers. This work provides a practical tool and a trustworthy framework for transparent financial risk modeling.

Suggested Citation

  • Yi Lu & Aifan Ling & Chaoqun Wang & Yaxin Xu, 2025. "Why Bonds Fail Differently? Explainable Multimodal Learning for Multi-Class Default Prediction," Papers 2509.10802, arXiv.org.
  • Handle: RePEc:arx:papers:2509.10802
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    File URL: http://arxiv.org/pdf/2509.10802
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