LAUSR

In this study, we demonstrate that high short-term gains on the A-share market may lead to significant losses in the future and potentially cause a market catastrophe. To study the accumulation, outbreak, and cross-sector spillover process of systemic risk in the Chinese stock market, we define right-tail risk as a large rally process that may lead to left-tail losses in the future and construct a tail volatility spillover network by distinguishing between left-tail and right-tail risk. In the risk accumulation process, the market expectation bias of common shocks considerably magnifies heterogeneity risk, and in the risk outbreak and spillover processes, the greatest systemically important and systemically susceptible sectors are banking and information technology, respectively. In addition, the level of risk spillover is extremely sensitive to tail shocks and increases as tail shocks intensify. Moreover, right-tail risk has more forward-looking predictive power for left-tail risk. Apart from achieving immediate regulatory objectives, Chinese authorities must consider market expectation bias when implementing rules. Additionally, authorities want to be wary of right-tail risk, which has the potential to create serious and pervasive damage in the future if the market is allowed to be unregulated during short-term spikes.