Presentation on YouTube.

Fund managers' ability to evaluate risk has important implications for their portfolio management and performance. We use a state-of-the-art deep learning model to measure fund managers' forward-looking risk assessments from their narrative discussions. We validate that managers' negative (positive) risk assessments lead to subsequent decreases (increases) in their portfolio risk-taking. However, only managers who identify negative risk generate superior risk-adjusted returns and higher Sharpe ratios, consistent with the evidence that cautious managers have better intraquarter trading skills and are less subject to overconfidence biases. Only sophisticated investors respond to the narrative-based risk assessment measure, suggesting limited attention by retail investors.

(with Sean Cao and Baozhong Yang)