BOK: "Stock Market Volatility Risks Remain...Need to Strengthen Monitoring and Improve Capital Market Structure"

Bank of Korea, September Monetary and Credit Policy Report

Leveraged Position Liquidations and Semiconductor Concentration Continue to Drive Volatility

Semiconductor Companies Have a Greater Impact on Korea’s Stock Market Than in Other Major Economies

Need to Strengthen Oversight of Leveraged ETFs and Margin Trading to Enhance Market Resilience

The Bank of Korea has assessed that, although market volatility has somewhat subsided following significant corrections in the domestic stock market due to the unwinding of leveraged positions, factors driving volatility still remain—such as the concentrated focus on semiconductor stocks. The central bank stressed the need to reorganize and strengthen monitoring frameworks for the stock and financial markets and to improve the structure of the capital market in order to enhance its resilience.

On September 10, the Bank of Korea, through the issue analysis section of its Monetary and Credit Policy Report—an evaluation of the recent rise in volatility in the domestic stock market (by Choi Taehan, Heo Jinwoo, and Kim Yeeun)—emphasized that the structural soundness of the capital market should be addressed. The report called for strengthening inspections of leveraged exchange-traded funds (ETFs) and margin stock investments, alleviating market concentration by specific semiconductor sectors and companies, and broadening the investor base.

Driven by expectations of a global boom in artificial intelligence (AI) and semiconductors, stock price gains became increasingly concentrated in a handful of semiconductor companies. As a result, stock price sensitivity to changes in the prospects of the memory semiconductor industry rose. Since June, amid a steep plunge in semiconductor companies’ stock prices, the domestic stock index also underwent significant corrections. The V-KOSPI (KOSPI volatility sensitivity index) and the standard deviation of daily returns leapt from 28.9 and 1.3%, respectively, at the end of last year to 93.8 and 4.7% by the end of June.

In particular, Korea’s stock market is more heavily weighted towards semiconductor companies than other major countries, amplifying their impact. This year, the main stock price volatility figures for key countries were 1.3% for the United States, 2.1% for Japan, but 4.1% for Korea, indicating a notably higher level.

Furthermore, as domestic stock prices rose significantly relative to other major nations, there was a wave of large-scale technical selling by foreigners both to realize profits and for portfolio rebalancing, which altered the supply-demand dynamics of the Korean stock market. Domestic leveraged positions and individual margin investments had reached historic highs before being unwound, which further amplified both upward and downward movements in stock prices. Additionally, the expansion of leveraged investments by international financial players in Korean equities led to an increase in domestic spot and futures trading for hedging purposes, creating unexpected ripple effects in the global financial market.

Although market volatility has recently eased to some extent, the ongoing concentration in semiconductor stocks highlights the need for a thorough assessment of volatility risk factors. Choi Taehan, head of the Bank of Korea’s Equities Team in the Financial Markets Department, commented, "In the short term, monitoring of leveraged ETFs and margin stock investments should be strengthened, while in the medium to long term, improving the capital market’s structure—such as mitigating market concentration by specific sectors and companies and expanding the investor base—is necessary in order to enhance market resilience to both domestic and external shocks."

Choi further noted, “As financial products linked to domestic semiconductor companies quickly expand overseas, the risk of these products unexpectedly impacting the domestic financial market is increasing, making it essential to reorganize and strengthen the relevant monitoring frameworks.”

This content was produced with the assistance of AI translation services.