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

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

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.

Suggested Citation

  • Fang, Guobin & Zhou, Xuehua & Ma, Huimin & Zhao, XiaoFang & Deng, YaoXun & Xie, Luoyan, 2025. "Economic policy uncertainty, investor sentiment and systemic financial risk: Evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:ecofin:v:76:y:2025:i:c:s106294082400281x
    DOI: 10.1016/j.najef.2024.102356
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    More about this item

    Keywords

    Economic policy uncertainty; Systemic financial risk; Investor sentiment; Risk transmission mechanisms;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • F68 - International Economics - - Economic Impacts of Globalization - - - Policy
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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