Over-expected shocks and financial market security: Evidence from China's markets

Abstract

Based on the quantile connectedness method, we investigate China's financial market's structural characteristics under varying shock scales. Our results reveal an asymmetric U-shaped pattern of risk spillovers within China’s financial market under different shock magnitudes. The measures of relative intensity and relative tail dependence indicators show that the risk spillover is much larger in the right tail than in the intermediate and conditional mean states. Moreover, different financial sub-markets exhibit time-varying heterogeneity when facing over-expected shocks. The elasticity of risk-shock is greater in the money and foreign exchange markets. The commodity market tends to take on risk, but becomes a significant source of risk spillover during over-expected shocks. These findings offer policymakers valuable insights to comprehensively evaluate risks and effectively formulate policies.