Investors on Thursday had a hard time coping with the high volatility of the Hong Kong stock market, with the benchmark Hang Seng Index once tumbling over 700 points, or 3.3 percent, before recouping lost ground.

Thursday's roller-coaster ride once again exposed the extreme vulnerability of market sentiment, which could bring about a cascading fall in asset prices any time the trigger is hit, a scenario the regulators shouldn't take lightly as it can threaten the stability of the city's financial market and the health of the local economy.

The most likely trigger is any finite signal that major central banks - led by the US Federal Reserve (Fed) - are ready to exit their quantitative easing policy.

While the odds of an immediate exit by any major central bank remain low given the still poor condition of major economies in the world, mere expectations of, or speculation over, such a move will be sufficient to turn asset markets upside down.

There are already signs that "hot money", which has pushed up asset prices - particularly real estate prices - to unsustainable levels over the past four years, is reversing its course and flowing out of emerging markets recently amid speculation about the Fed tapering its quantitative easing operation soon, causing volatility in many of these markets.

Should money outflows accelerate, Hong Kong's overly inflated property market will be most vulnerable to an implosion of asset bubbles, which in turn is likely to cause trouble to lenders, and deal a heavy blow to the local economy given its heavy reliance on the property sector.

Hong Kong should draw a lesson from the ordeal after the collapse of the property market following the Asian financial crisis in 1997/8. To prevent a similar situation from happening again, our monetary authority and regulators should have countermeasures on hand and keep themselves fully alert for any negative development in the market, while home buyers should weigh up their risk tolerance before taking any action.

The author is a current affairs commentator.

(HK Edition 06/14/2013 page9)