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

ArXiv ID: 2509.10802 “View on arXiv”

Authors: 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.

Keywords: Bond Default Prediction, Explainable AI (XAI), Time-Aware LSTM, Financial Risk Modeling, Multimodal Deep Learning

Complexity vs Empirical Score

• Math Complexity: 6.5/10
• Empirical Rigor: 7.0/10
• Quadrant: Holy Grail
• Why: The paper introduces advanced deep learning concepts like Time-Aware LSTMs and multi-level attention with custom loss functions, indicating moderate-to-high math complexity. It also demonstrates strong empirical rigor with a large dataset (1994 firms, 2015-2024), ablation studies, and benchmark comparisons against traditional models, making it backtest-ready.

  flowchart TD
    A["Research Goal: Develop Explainable<br>Multimodal Model for Multi-Class<br>Bond Default Prediction"] --> B
    
    subgraph B ["Data & Methodology"]
        direction TB
        B1["Data: 1994 Chinese Firms<br>2015-2024"] --> B2["EMDLOT Framework<br>Inputs: Numerical Time-Series +<br>Unstructured Text"]
    end
    
    B --> C{"Computational Process"}
    
    C --> D["Time-Aware LSTM<br>Handles Irregular Temporal Data"]
    D --> E["Multi-Level Attention<br>& Soft Clustering for<br>Interpretability"]
    
    E --> F
    
    subgraph F ["Key Findings & Outcomes"]
        F1["Superior Performance vs.<br>Baseline Models XGBoost/LSTM"]
        F2["Higher Recall & F1-Score<br>for Default/Extended Firms"]
        F3["Economically Intuitive<br>Default Drivers Revealed"]
    end