The Anatomy of Fear and Greed: Asymmetric Risk Spillovers in China’s Financial System

This paper challenges the conventional wisdom that systemic risk is primarily a feature of market downturns. We test the hypothesis that financial fragility intensifies symmetrically at both extremes of market sentiment, uncovering a “smile curve” in risk transmission across China’s financial markets. Using daily data from 2009 to 2025, our multi-stage framework combines bubble detection (GSADF) with dynamic connectedness modeling (TVP-VAR). Our central finding is that total connectedness is significantly elevated not only during extreme bear markets (“fear”) but also, symmetrically, during exuberant bull markets (“greed”). Our robustness analysis suggests distinct mechanisms drive this symmetry: “fear” contagion is significantly amplified by the retail-dominated stock market, whereas “greed” co-movement is a more fundamental feature that persists even within the institutional core of the financial system. These findings imply that macroprudential oversight must be vigilant during periods of market ebullience, not just during crises.

JEL Classification: G15, G12, G01, C58, E44