Incremental Explanatory Power of Foreign Portfolio Rebalancing and Single-Stock Leveraged and Inverse ETF Dynamics in Explaining 2026 Short-Term KOSPI Volatility Beyond Conventional Factors: A Sequential and Hierarchical Regression Approach

This study conducted a time-series analysis of the Korean stock market to evaluate the drivers of short-term KOSPI volatility in mid-2026. The study period was one year, from August 1, 2025 to July 31, 2026 (Period 1: baseline, full year). It was further segmented into two sub-periods based on KOSPI trends: the rally (Period 2) and the plunge phase (Period 3). First, bivariate correlation analyses were conducted between KOSPI daily log returns and proxy variables representing conventional macroeconomic, microstructural, and behavioral factors to assess their relationship with KOSPI volatility; subsequently, the correlations of emerging factors (foreign institutional portfolio rebalancing and single-stock leveraged and inverse ETF dynamics) were analyzed. Then, sequential regression analyses were conducted to assess each model's explanatory power for KOSPI volatility: conventional factors (Model 1), emerging factors (Models 2a-2c), and an integrated (Model 3, hierarchical regression). The results showed conventional factors were associated with KOSPI volatility during Period 1 and Period 2, whereas volatility in Period 2 and Period 3 was closely associated with emerging factors. The sequential regression analyses further supported these correlations, showing a substantial increase in explanatory power, as R2 increased from .285 in Model 1 to .953 in Model 3; the overall regression was statistically significant (F = 27.858, p < .001), suggesting a potential amplifying effect of emerging factors. The Durbin-Watson statistic and VIF values were statistically acceptable. Overall, foreign portfolio rebalancing and single-stock leveraged and inverse ETF-related dynamics explained KOSPI volatility better than conventional factors. This suggests a potential risk that domestic microstructural factors, such as ETF dynamics, may amplify market volatility arising from instability in global capital flows.