South Korea’s financial regulator has conducted a rare internal simulation report on the stock market to find it overheated if the main index hits 3,300 threshold.
According to sources at the agency, the Financial Supervisory Service (FSS) in August had studied the boiling point of the Kospi based on the macroeconomic analysis model that Harvard Business School Professors Robin Greenwood and Samuel G. Hanson published in June 2020 paper titled “Predictable Financial Crises.”
The Kospi had jumped to 2,326 on Aug. 31 from 1,755 on March 31 last year. It briefly breached 3,200 Monday in just four sessions since 3,000 was broken.
The simulation counted in household and corporate credit status, housing prices and stock prices as of June 2020 and consulted with the designers of the analysis model to assess the overshooting level of the Kospi.
The researchers found Kospi at 3,300 would be overvalued against Korean macroeconomic factors, one FSS official said, adding that the finding was reported to the higher level.
Greenwood, Hanson and colleagues identified signs of financial crisis from sudden surge in liquidity.
They warned that the chance of a financial crisis taking place within the next three years rose to 40 percent from 7 percent due to buildup of credit and asset appreciation. Similar signs had shown in 2006 before the global meltdown broke out.
Kospi remains sizzling hot even after an uninterrupted rally from the second quarter of last year.
Individuals bought a record 4.49 trillion won ($4.1 billion) on Monday to hoist up the Kospi to new levels, despite ferocious selling of 3.74 trillion won by institutions and 717.6 billion won by foreigners.
Kospi fell 1.04 percent to 3,115.55 in Tuesday morning trading.
Alarm bells rang. The volatility index of Kospi 200 (VKOSPI) hit a seven-month high on Monday, rising 22.17 percent from the previous session to close the day at 35.65.
VKOSPI is a real-time market index representing the market’s expectations for volatility over the coming 30 days. It is used to measure the level of risk, fear or stress in the market. It tends to spike when the index plunges. The VKOSPI has been rising in tandem with Kospi strides in the new year. VKOSPI in the first six sessions of 2021 jumped 61.39 percent. Kospi also rose 9.6 percent during the same period.
By Kim Yoo-sin, Shin Yoo-kyung and Kim Hyo-jin
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