Bank of Korea: "Leveraged ETFs and Borrowed Investments Drive Market Volatility... Monitoring and Structural Improvement Needed" (Summary)

Bank of Korea's September Monetary Policy Report
Samsung Electronics and SK hynix Share Prices
Significantly Influence KOSPI Volatility
Leverage Unwinding and Semiconductor Stock Concentration
Continue to Drive Volatility Up and Down
Need for Stronger Oversight of ETFs and Borrowed Investments,
Enhancing Market Resilience

The Bank of Korea has assessed that investments in leveraged Exchange Traded Funds (ETFs) and borrowed funds have contributed to the increased volatility in domestic stock prices.

After a significant correction in the Korean stock market recently, volatility has somewhat eased due to the unwinding of leveraged positions. However, the Bank of Korea noted that factors driving volatility still remain, such as excessive concentration in semiconductor stocks.

This suggests a need to update and strengthen stock and financial market monitoring systems, and to improve the structure of the capital market in order to enhance its resilience.

In an issue analysis included in its Monetary Policy Report released on September 10, Bank of Korea researchers Choi Daehan, Hur Jinwoo, and Kim Yeeun stated that there is a need to pursue measures to improve the capital market’s fundamentals. These measures include strengthening checks on leveraged ETFs and borrowing-driven stock investments, reducing market concentration in semiconductor sectors and companies, and broadening the investor base.

Driven by expectations for the global artificial intelligence (AI) and semiconductor boom, stock price gains became concentrated among a handful of semiconductor companies. As a result, the sensitivity of share prices to changes in the memory semiconductor market outlook has increased. Since June, the sharp decline in semiconductor company shares has led the domestic stock indices to make significant corrections as well.

The sensitivity index of the KOSPI (V-KOSPI) and daily return volatility each surged from 28.9 and 1.3% at the end of last year to 93.8 and 4.7% at the end of June. In South Korea, the proportion of semiconductor companies in the stock market is higher than in other major countries, so movements in these companies’ stocks have an outsized impact on domestic indices. This year, the volatility of key global equity indices stood at 1.3% for the United States, 2.1% for Japan, but was a higher 4.1% for Korea.

Indeed, as the share prices of a limited number of semiconductor firms like Samsung Electronics and SK hynix experienced relatively greater fluctuations, the overall volatility of the market increased.

When the KOSPI surged from 8,000 to 9,000, the contribution to the index increase was 44.7% from Samsung Electronics and 54.3% from SK hynix, totaling 99.0%. Conversely, when the KOSPI plunged from 9,100 to 5,500, the negative contribution was 29.8% from Samsung Electronics and 39.6% from SK hynix, totaling 69.3%.

Park Jongwoo, Deputy Governor of the Bank of Korea, stated at a media briefing that “expectations for the memory semiconductor business had the greatest impact on stock price volatility.”

In addition, domestic leveraged positions and individual investments using borrowed funds had reached record highs, and the subsequent unwinding amplified both upward and downward movements in stock prices. Furthermore, as leveraged investment in domestic stocks by international investors increased and related hedging transactions in the spot and futures markets grew, this led to unexpected ripple effects in the local financial markets.

On top of this, as domestic stock prices rose more sharply than those in other major countries, foreign investors engaged in large-scale technical selling for profit-taking and portfolio rebalancing, resulting in changes to the local stock market’s supply and demand dynamics.

While volatility has somewhat subsided lately, the Bank of Korea pointed out that as the concentration in semiconductor stocks persists, it is necessary to closely examine drivers of increased volatility going forward.

Deputy Governor Park added, “the scale of leveraged ETFs has been reduced significantly,” but also stressed, “this is not a situation where we can be complacent, so ongoing monitoring is required.”

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