KOSPI Fear Index Returns to Pre-COVID-19 Levels... "Factors Remain That Could Increase Volatility"

VKOSPI Hits Lowest Level in 1 Year and 5 Months... Surged to 69.24 in March Last Year

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[Asia Economy Reporter Gong Byung-sun] The 'KOSPI200 Volatility Index' (VKOSPI), known as the fear index, has reached its lowest level in 1 year and 5 months. However, factors that could increase volatility remain, so it is expected that the situation will need to be monitored going forward.

According to the Korea Exchange on the 4th, VKOSPI closed at 13.74 on the 2nd, down 4.12% from the previous day. This is the lowest level since January 20 last year (13.64), when the first domestic COVID-19 case was confirmed.

VKOSPI is an indicator that measures stock market volatility, calculated based on the option pricing theory which implies that KOSPI200 option prices reflect the market's expected future volatility. Typically, when the stock index plunges, VKOSPI rises and is called the fear index. In fact, on March 19 last year, when stock prices plummeted due to COVID-19, VKOSPI surged to 69.24. This was the highest level in 11 years and 4 months.

The current drop of VKOSPI to its lowest level can be interpreted as the market risk having significantly decreased as the stock market has been trading within a box range. This is also a result of positive factors such as economic recovery and earnings improvement coexisting with concerns like inflationary pressures and interest rate hikes. Last month, the KOSPI did not experience any day with more than a 1% rise or fall, indicating reduced volatility.

However, factors that could increase volatility remain. Recently, the U.S. Federal Reserve (Fed) has mentioned normalization of monetary policy, including tapering asset purchases. When James Bullard, President of the Federal Reserve Bank of St. Louis, made remarks about early interest rate hikes over the weekend of the 21st last month, the KOSPI fell nearly 1%.

There is also a possibility that the momentum for earnings improvement may slow down. KB Securities forecasted that the operating profit growth rate of companies listed on the Korea Exchange increased by 118% year-on-year in the first quarter, but is expected to decline to 69.1% in the second quarter and 37.3% in the third quarter.

Jeon Gyun, a researcher at Samsung Securities, said, “In the first half of the year, risk asset preference was high reflecting the momentum of rapid economic recovery after COVID-19, but in the second half, although recovery continues, momentum may slow down. If tapering is brought up at the Jackson Hole meeting in August, stock market volatility could increase.”

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