To mitigate the extreme volatility in the domestic stock market, experts suggest refining the activation criteria for the volatility control device (VI) to reflect the characteristics of individual stocks and expanding the base of long-term institutional investors in South Korea.
According to a report by senior researchers Kim Jun-seok and Jang Geun-hyuk from the Capital Market Research Institute, released on August 17, the report analyzes the significant increase in KOSPI volatility during the first half of this year and proposes corresponding measures.
The report indicates that the daily return volatility of the KOSPI reached 3.6% in the first half of this year, more than double last year's figure of 1.4%. Notably, volatility in March and June was recorded at 4.8% and 4.7%, respectively, surpassing the 4.2% level seen in March 2020 during the COVID-19 market crash. In contrast, the average volatility among 36 major countries only slightly increased from 1.1% last year to 1.2% this year.
The increased volatility is largely attributed to the growing influence of Samsung Electronics and SK Hynix. The market capitalization of these two companies rose from 23% at the beginning of last year to 34% at the start of this year, and further to 55% by the end of June. Their daily return volatility also increased from 2.2% and 3.4% last year to 4.9% and 5.6% this year, respectively. The correlation coefficient of returns between the two companies reached 0.82. Consequently, the daily return volatility of the KOSPI 200 increased from 1.5% last year to 3.8% this year, with approximately one-third of this increase attributed to the volatility of these two stocks.
The researchers recommend expanding the use of weighted indices to alleviate concentration in specific stocks and sectors linked to index products and suggest differentiating the VI activation criteria based on the liquidity and volatility of individual stocks.
Currently, the dynamic VI applies a threshold of ±3% for KOSPI 200 stocks and ±6% for others, while the static VI applies a ±10% threshold for all stocks based on the previous day's closing price. The researchers emphasize the need to optimize the activation criteria according to the characteristics of individual stocks and to adjust them periodically instead of applying a uniform standard.
Additionally, they argue for the expansion of the domestic long-term investor base through retirement pensions, personal pensions, and long-term public funds, as long-term institutional investors tend to reduce their holdings during market upswings and increase them during downturns. They also highlight the necessity of utilizing bulk trading platforms to minimize price shocks from institutional large trades and the ongoing monitoring of single-stock leveraged and inverse ETFs.
* This article has been translated by AI.
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