An electronic board in a trading room at Hana Bank's Seoul headquarters displays the Kospi and Kosdaq indices alongside the won-US dollar exchange rate on Thursday. (Yonhap)

South Korea's financial markets experienced brief volatility on Thursday following President Yoon Suk Yeol's refusal to step down but quickly regained stability, signaling potential for a steady recovery.

The benchmark Kospi opened 14.12 points higher at 2,456.63 on Thursday.

The early gain followed a two-day rally -- the first consecutive upswing on the Kospi since President Yoon's short-lived declaration of martial law last Tuesday, which sent shockwaves through society and the markets.

Momentum quickly reversed, however, after President Yoon in a public address rejected calls for him to resign. The announcement sent the index tumbling to an intraday low of 2,449.16 by 9:45 a.m. The losses were mostly recovered, with the index fluctuating at around 2,470 by 2:30 p.m.

The initial uptick was driven by retail investors, who turned to buying after a four-day sell-off. However, by the afternoon, retail investors reversed course, selling around 35 billion won in Kospi shares as of 2:30 p.m.

Foreign investors sharply accelerated their sell-off following Yoon's address. They offloaded approximately 260 billion won in shares on the Kospi, exceeding the 250 billion won sold over the previous two days.

Institutions helped cushion further losses with net purchasing of around 200 billion won.

The tech-heavy secondary Kosdaq opened higher at 680.97, up 0.74 percent from the previous day. It reached an intraday high of 686.78 before stabilizing around the 680 level.

Yoon's remarks intensified volatility in the currency markets as well. The Korean won opened at 1,429.1 against the US dollar, down 3.1 won from Wednesday's close of 1,426.9. Initially, the local currency showed signs of relief, climbing to 1,428.2 by 9:30 a.m. However, following the president's announcement, the won weakened further, nearing 1,435 won in the morning before stabilizing around 1,433 won.

Despite a brief surge in volatility, analysts believe Yoon's actions on Thursday will have a limited impact.

"While the market briefly fluctuated, upward momentum quickly resumed, with the Kospi even surpassing the morning's high, signaling that the market sees some resolution of the uncertainty," said Jeong Yong-taek, an economist at IBK Securities, adding, "With resignation no longer on the table, impeachment has become the main option, with an increasing likelihood that Yoon's impeachment will be passed at the National Assembly. The process now hinges on the Constitutional Court."

However, Jeong cautioned that a sharp recovery is unlikely in the near term.

"Fundamentally speaking, the market remains weighed down by a worsening economic outlook, which has been priced in since before the emergency. With little improvement expected next year, a sharp rebound seems unlikely. However, reduced uncertainty compared to last week will help keep the volatility at its current levels," he added.