Korea Capital Market Institute

This study examines the characteristics and market relevance of a Capital Market Sentiment Index (CMSI) constructed by fine-tuned transformer-based large language model (LLM) on a large corpus of Korean economic and financial news articles. By utilizing data from January 2010 to March 2025, the CMSI co-moves significantly with major global sentiment indices, Korean equity market returns, option-implied measures of investor fear and hedging demand, speculative demand for derivative-based ETFs, and key indicators of equity market trading activity and IPO dynamics. In particular, the CMSI is strongly associated with individual investor trading and with IPO first-day premiums—suggesting that shifts in sentiment propagate more prominently through noise traders and firms operating under high information asymmetry. Analyses of the relationship between sentiment and stock returns find that while the CMSI exhibits limited medium-horizon predictability for aggregate stock market returns, it meaningfully forecasts short-horizon market movements in the same direction as contemporaneous sentiment shifts. Cross-sectionally, optimistic (pessimistic) sentiment is associated with overpricing (underpricing), especially among firms that are hard-to-value or exhibit strong lottery-like features. These results indicate that the CMSI contains economically meaningful information for explaining the cross-section of stock returns. Overall, this study provides empirical evidence on the validity and usefulness of an LLM-based sentiment index in the context of equity markets. As the use of unstructured data and advanced NLP methods becomes increasingly important in financial research, these findings illustrate that LLMs can serve as an effective tool for capturing nuanced, latent investor sentiment embedded in textual information.

This study provides a comprehensive discussion of the “Capital Market Sentiment Index (CMSI),” regarding its conceptual background, construction methodology, statistical properties, and potential applications. As macroeconomic uncertainty and market volatility continue to rise, the need to incorporate unstructured information alongside conventional metrics has become increasingly important. In response, the index is designed to quantitatively measure the qualitative judgments, emotions, expectations, and concerns of capital market participants. This study provides a detailed explanation of the method to construct an index that quantifies market participants’ perspectives by training a transformer-based, general-purpose large language model (LLM) on Korean news data. The significance of this study lies in its enhancement of the transparency and explainability of an index built using an LLM. By providing detailed explanations of the news text preprocessing procedures and learning algorithms, the study strengthens model’s transparency and reproducibility. Furthermore, through Shapley value analysis, outputs are decomposed into the contribution of each input word, enabling quantitative interpretation. Sentiment measured at the sentence-level is used to construct multi-layered index time series based on daily averages and variances, and application strategies are proposed based on their statistical characteristics. The Capital Market Sentiment Index is valuable in supporting evidence-based decision-making. In particular, as a high-frequency indicator derived from unstructured textual information, it offers strong use case for real-time monitoring of investor sentiment and for evaluating policy effects. The model developed in this study can serve as a foundation for future research aimed at advancing the index framework through the introduction of multidimensional classification schemes and the application of multimodal models.

As the advancement of capital markets and corporate value-up policies gain momentum, the importance of the Stewardship Code, which encourages responsible investment by institutional investors, is growing significantly. The Stewardship Code serves as a set of guidelines for institutional investors to actively engage in enhancing the long-term value of investee companies for the benefit of their clients and beneficiaries, moving beyond the role of mere shareholders. It has established itself as a core institution in major global capital markets for improving corporate governance and restoring market trust. Since introducing the Stewardship Code in 2016, Korea has shown certain achievements, including a steady increase in the number of participating institutions and a gradual rise in institutional investors' exercise of opposing voting rights and shareholder engagement activities. However, despite these changes, the lack of a system to monitor code implementation means core principles are not being properly adhered to, limiting its effectiveness. Most participating institutions do not systematically disclose their fiduciary responsibility activities, and voting practices often amount to little more than formal disclosure. Moreover, current regulations, such as large shareholding reporting and restrictions on proxy solicitation, constrain institutional investors' active and cooperative shareholder activities. In the absence of incentives for diligent implementation or penalties for non-compliance, institutional investors' ‘rational indifference’ is becoming entrenched. Accordingly, this report proposes the following policy tasks to enhance the effectiveness of the Stewardship Code. First, the substantive nature of implementation plans should be verified from the registration stage, and the accountability of participating institutions should be strengthened through regular implementation evaluations and disclosure of results. Second, legal uncertainties surrounding shareholder rights exercise, such as regulations on large shareholding reports and proxy solicitation, should be resolved. Clear interpretation guidelines aligned with international standards should be established to guarantee institutional investors' legitimate shareholder activities. Third, pension funds like the National Pension Service must strengthen their role as key drivers of market-wide implementation. They should faithfully execute and disclose their own fiduciary responsibility activities while qualitatively evaluating and publishing the code compliance of their outsourced managers. Fourth, an efficient support system for code implementation should be established. This includes introducing principles for cooperative shareholder engagement, forming investor forums to support these principles, providing practical guidelines from policy authorities, and encouraging voluntary disclosure efforts by companies.

The Financial Services Commission and the Bank of Korea announced the principle of transitioning the benchmark interest rate system from CD rate, which has been widely used as a reference rate for financial transactions, to a KOFR-centered system. The Korean won interest rate swap sector, which primarily uses CD rate, has large transaction volumes and is closely linked to the use of KOFR in other financial transactions, making the activation of the KOFR OIS market a key task for transitioning to a KOFR-centered benchmark interest rate system. Establishing an OIS market based on risk-free benchmark rates was one of the most important tasks in the global benchmark interest rate reform process. Two turning points can be observed in the formation of the U.S. SOFR OIS market. First, medium- to long-term SOFR OIS transactions increased as CCPs' price alignment interest and discount rates transitioned to a SOFR basis. Second, SOFR OIS transactions surged after the implementation of the SOFR FIRST policy, and SOFR OIS became mainstream in the USD interest rate swap market, replacing LIBOR IRS. Unlike major countries, Korea did not previously have an OIS market or short-term interest rate derivatives market, so forming a KOFR OIS market requires meticulous policy design and active participation by market participants from the initial stage. To date, market infrastructure has been established to activate the domestic KOFR OIS market, including the listing of KOFR futures, the commencement of central clearing, and the application of KOFR to price alignment interest. Financial authorities have begun administrative guidance requiring major financial institutions to conduct at least 10% of their interest rate swap transactions as KOFR-linked transactions. Going forward, financial authorities need to focus on activating medium- to long-term KOFR OIS transactions and, while monitoring market formation, apply KOFR OIS to CCPs' discount rates for interest rate swap valuation at an appropriate time. Individual financial institutions need to explore strategies for utilizing KOFR OIS, considering that KOFR, being based on RP transactions, better reflects actual funding costs than CD rate. Additionally, they should prepare to apply KOFR OIS rates as derivatives valuation discount rates, considering future global alignment and the possibility of central counterparties transitioning their discount rates.

The global stablecoin market has grown rapidly since 2020, and discussions on introducing such assets domestically have also been active. Concerns remain regarding the financial soundness of issuers and the possibility of coin runs, but some argue that Korea should nevertheless explore potential use cases domestically, given the technological advantages and operational efficiency of stablecoins. Considering the shift toward the digital economy and the policy directions pursued by major economies, Korea will need to determine how to establish the regulatory framework on the stablecoins. Major economies abroad are quickly establishing institutional frameworks for stablecoins. The United States has laid the groundwork for activating the U.S. dollar-based stablecoin market through the passage of the GENIUS Act, while the EU has established a comprehensive regulatory framework for crypto-assets(including stablecoins) through MiCA. Japan, in contrast to the U.S. and EU, has adopted a unique approach under its Payment Services Act(PSA). By interpreting stablecoin issuance and redemption as fundamentally equivalent to payment service, Japan incorporated stablecoin regulation into its PSA rather than into digital-asset-specific legislation. Although the U.S., EU, and Japan each take distinct approaches, they show consistent attitudes toward user protection. Their core principles include maintaining 1:1 reserve assets, ensuring verification and disclosure of reserve assets, assigning clear responsibility for redemption obligations and procedures, and imposing prudential requirements on issuers. When introducing a stablecoin framework in Korea, it is necessary to include rules for reserve-asset requirements and management methods, minimum capital standards for issuers, adjustments to regulatory requirements based on issuance scale, and mechanisms to prevent coin runs so as to ensure market stability and user protection. Specifically, issuers should be required to maintain reserve assets at a level exceeding the outstanding stablecoin balance at all time, manage reserves only by highly liquid and low-credit-risk safe assets, and undergo periodic external audits to verify secure reserve management. It is also important to clearly define the issuer’s redemption obligations and publicly disclose transparent redemption procedures to ensure market credibility. Prudential regulations should ensure the issuer’s financial soundness, and capital requirements could be adjusted upward depending on the scale of issuance.

The brokerage services market in South Korea has experienced notable quantitative and structural transformations in recent years. This expansion, along with new market entrants and the extension of services to foreign markets, has intensified competition among brokerage firms. As a result, brokerage commission rates have declined sharply—by about 4 basis points for domestic equities and 17 basis points for foreign securities since 2017. Nevertheless, with commission rates already at historically low levels (around 4 bps for domestic and 8 bps for foreign securities as of end-2024), the effectiveness of additional price competition in attracting investors or increasing market share appears limited. Empirical evidence indicates that price competition benefits primarily large securities firms, yet even for them the marginal impact is expected to decline further. Their competitive advantage is largely derived from superior non-price factors such as marketing capacity, product diversity, service differentiation, and trading platform capabilities. In the longer term, strengthening non-price dimesions will be crucial for sustaining market position, as traditional price competition in Korea’s brokerage services market has largely reached its limits.