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Tone or term: Machine-learning text analysis, featured vocabulary extraction, and evidence from bond pricing in China

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  • Peng, Yueqian
  • Shi, Li
  • Shi, Xiaojun
  • Tan, Songtao

Abstract

We apply the machine-learning technique proposed by Zhou et al. (2024) to analyze credit rating reports in China’s bond markets, identifying featured vocabulary and generating text analysis scores. Compared with the traditional bag-of-words text analysis, evidence suggests three advantages of machine-learning scoring. Firstly, it covers featured vocabulary that compensates for missing information; secondly, it reduces misclassification of words’ sentiments; moreover, it mitigates the problem of equal weighting inherent in the bag-of-words method. Our findings indicate that the featured vocabulary neglected in the bag-of-words method plays a crucial role in text analysis and significantly contributes to bond pricing. Additionally, we find that machine-learning text analysis can address AAA rating inflation within China’s bond markets to some extent. In contrast, the bag-of-words method exhibits limited efficacy in mitigating this issue.

Suggested Citation

  • Peng, Yueqian & Shi, Li & Shi, Xiaojun & Tan, Songtao, 2024. "Tone or term: Machine-learning text analysis, featured vocabulary extraction, and evidence from bond pricing in China," Journal of Empirical Finance, Elsevier, vol. 78(C).
  • Handle: RePEc:eee:empfin:v:78:y:2024:i:c:s0927539824000690
    DOI: 10.1016/j.jempfin.2024.101534
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    More about this item

    Keywords

    Machine learning; Text analysis; Rating reports; Bond pricing; Credit rating inflation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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