South Korea's Democratic Party K-Capital Market Special Committee is considering reducing single-stock ETF leverage ratios from 2x to 1.5x amid volatility concerns. Academic analysis using a 2022 formula by Matthew Cruz of Westminster University calculated optimal leverage at 1.44x for SK Hynix stocks and 1.84x for Samsung Electronics stocks based on 10-year daily closing prices. The proposed 1.5x ratio aligns closely with SK Hynix's calculated value but falls below Samsung's optimal level, suggesting differentiated ratios per stock may be more academically sound than uniform application.
Academic Formula Calculates Optimal Leverage Ratios for Korean Stocks
Yonhap Infomax applied the leverage cap formula from Cruz's 2022 paper "Averting Catastrophe: Regulating Leverage Limits for Single-Stock Leveraged ETFs" to 10-year daily closing price data for Samsung Electronics and SK Hynix. The formula determines the maximum leverage ratio at which compounding effects (volatility drag) do not erode expected returns. SK Hynix's academically appropriate leverage ratio was calculated at 1.44x, while Samsung Electronics reached 1.84x. Both figures fall below the current 2x standard.
Cruz recommends using long-term volatility rather than short-term spikes, specifically suggesting the higher value between 5-year and 10-year historical volatility. This methodology was followed in the calculations. The formula's structure lowers the leverage cap as volatility increases.
SK Hynix Shows Higher Volatility Than Samsung Electronics
The calculated 5-year annualized volatility reached 37.0% for Samsung Electronics and 51.0% for SK Hynix. SK Hynix's higher volatility resulted in a lower optimal leverage ratio compared to Samsung Electronics. The proposed 1.5x reduction approaches SK Hynix's calculated value (1.44x) but represents an unnecessarily low figure for Samsung Electronics (1.84x).
The Financial Services Commission cited Samsung Electronics at 96% and SK Hynix at 113% volatility figures, which represent annualized values from approximately the past two months of short-term volatility. Applying these figures to the formula results in optimal ratios in the low 1x range for both stocks.
Beneficiary Meeting Required to Modify Existing ETF Leverage
Reducing leverage ratios for already-launched products requires a beneficiary general meeting with all investors present. Given ETF characteristics allowing daily creation and redemption, this procedure is as complex as a shareholder meeting. Swift implementation at the National Assembly level faces practical difficulties.
Asset Management Industry Urges Gradual Policy Implementation
A senior official at an asset management company stated that the Financial Services Commission has already announced comprehensive measures including deposit increases and trading unit expansion, which are being implemented in stages. The official said observing the effects of existing measures should come first. The official added that rapidly introducing consecutive measures prevents verification of whether individual actions were actually effective.
The return parameter used in the academic formula was optimized using U.S. S&P 500 stock data, presenting some limitations for direct application to domestic stocks.
FAQ
What leverage ratio did the academic formula calculate for SK Hynix stocks?
The academic formula from Matthew Cruz's 2022 paper calculated an optimal leverage ratio of 1.44x for SK Hynix based on 10-year daily closing price data and 5-year annualized volatility of 51.0%.
Why does SK Hynix have a lower optimal leverage ratio than Samsung Electronics?
SK Hynix's 5-year annualized volatility reached 51.0%, higher than Samsung Electronics' 37.0%. The academic formula lowers the leverage cap as volatility increases, resulting in SK Hynix's 1.44x optimal ratio compared to Samsung's 1.84x.
What procedure is required to reduce leverage ratios for existing single-stock ETFs?
Reducing leverage ratios for already-launched ETF products requires holding a beneficiary general meeting with all investors present, a procedure as complex as a shareholder meeting due to ETFs' daily creation and redemption characteristics.
