Leveraged ETF Reform and Intra-Sector Correlation Dynamics: Evidence from Korea’s KOSPI

Abstract

This paper documents a sharp escalation in intra-sector conditional correlation among large-cap KOSPI equities coinciding with South Korea's introduction of single-stock 2× leveraged exchange-traded funds (ETFs) in 2026. Using a DCC-GJR-GARCH(1,1) model estimated on daily returns for a 24-stock panel of KOSPI constituents from July 1, 2024 to July 21, 2026 (N=467), we find that average pairwise dynamic conditional correlation rose from 0.2912 in the pre-reform baseline to 0.3675 during the ETF-live period (May 27–July 15, 2026), and further to 0.4509 in the three trading days following the Financial Services Commission's (FSC) emergency regulatory tightening of July 16, 2026. All three regime-to-regime differences are statistically significant under Welch two-sample t-tests (pre-reform to ETF-live: Δ=+0.0763, t=3.286, p=0.0011; ETF-live to post-FSC: Δ=+0.0834, t=2.719, p=0.0102; pre-reform to post-FSC: Δ=+0.1597, t=2.087, p=0.0375). An Andrews (1993) SupF structural break test identifies an overwhelming break (SupF=278.597, far exceeding the 1% critical value of 12.16) on March 2, 2026 — 86 days before the ETFs began trading but only 32 days after the FSC's January 29, 2026 policy announcement — suggesting that anticipatory repositioning may be central to the correlation shift. A complementary event-window analysis around the July 16 tightening shows a further increase (baseline ρ=0.399 to post-event ρ=0.506, t=2.752, p=0.009). Pair-level analysis shows that the largest correlation increases concentrate not in the ETF underlyings but in non-underlying pairs spanning batteries, healthcare, financials, and technology — for example Samsung SDI × Rino Industrial (Δ=+0.507) and Samsung Biologics × Woori Financial (Δ=+0.481). Causal attribution to any single mechanism is not possible given the short post-FSC window and absence of ETF flow data; results are offered as a quasi-natural-experiment description of an ongoing episode.

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