Economic policy uncertainty, investor sentiment and systemic financial risk: Evidence from China

Guobin Fang, Xuehua Zhou, Huimin Ma, XiaoFang Zhao, YaoXun Deng and Luoyan Xie

The North American Journal of Economics and Finance, 2025, vol. 76, issue C

Abstract: Based on the construction of systemic financial risk metrics using the TVP-FAVAR model, this paper explores the dynamic evolutionary relationship between economic policy uncertainty (EPU), different dimensions of investor sentiment and systemic financial risk using the TVP-SV-VAR model. It also examines the cross-market contagion mechanism of systemic financial risk under EPU shocks and the role of investor sentiment in it from two dimensions: financial market and economic fundamentals. The study finds that (1) the short- and medium-term effects of EPU on systemic financial risk are more stable and significant than the long-term effects. (2) Micro investor sentiment has the strongest shock effect on systemic financial risk. (3) There are differences in the timing and extent of direct shocks to EPU across financial sub-markets and economic sectors, and risk contagion effects among each other and indirect shocks from investor sentiment further increase the level of systemic financial risk. This study is of great significance for coping with EPU and investor sentiment shocks and preventing and resolving systemic financial risks.

Keywords: Economic policy uncertainty; Systemic financial risk; Investor sentiment; Risk transmission mechanisms (search for similar items in EconPapers)
JEL-codes: C32 C50 F68 G41 O11 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:76:y:2025:i:c:s106294082400281x

DOI: 10.1016/j.najef.2024.102356

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