Market memory and debt cliff dynamics in China’s LGFV bond market

This study resolves a paradox in China’s LGFV bond market: why high-memory regimes experience the most severe crashes and slowest recoveries, despite theoretical higher risk tolerance. We develop a unified framework integrating Fractional Brownian Motion with dynamic threshold theory, positing the Hurst exponent (H) as the core state variable. Empirically, we identify a tripartite memory structure and show that thresholds are regime-dependent rather than monotonic, with high-H regimes exhibiting the lowest actual thresholds. We resolve this paradox by introducing the concept of Effective Risk Tolerance, which quantifies the double-edged nature of long memory: enabling prolonged risk buildup yet triggering amplified corrections and the slowest recoveries. Our findings formalize market memory as a fundamental driver of cliff-effect dynamics, revealing the resilience paradox (policy insensitivity in low-H regimes) and oscillatory mean reversion (moderate recovery in low-H), providing a regime-specific lens for targeted financial regulation.