Korea Capital Market Institute

The Korean public fund industry has undergone significant structural changes amid the rapid growth of Exchange-Traded Funds (ETFs). Traditional mutual funds—once the main driver of market expansion—have seen stagnating growth and declining market presence, while ETFs, with their low fees and trading convenience, have surged to surpass public mutual funds in both net assets and market share around 2022. Since then, the overall growth of the collective investment market has been led by ETFs, widening the gap between the two sectors. This transition highlights ETFs’ position as an attractive investment vehicle but also signals the weakening competitiveness of traditional public funds. However, ETFs’ index-linked structure inherently limits portfolio diversity and active management. Even “active ETFs” are typically designed to maintain high correlations with benchmark indices, which constrains their ability to provide meaningful diversification or differentiated performance. In contrast, traditional public funds can actively deviate from benchmarks, engage in stock selection based on unique strategies, and expose investors to distinct sources of risk and return. Such flexibility allows them to pursue portfolio differentiation strategies that align with diverse investor preferences. This study focuses on portfolio differentiation as a sustainable growth strategy for public mutual funds amid intensified competition with ETFs. Its objective is to empirically assess how differentiated portfolio strategies—reflecting each fund’s unique management philosophy and style—affect (1) fund flows (investor subscriptions and redemptions) and (2) the market share of asset management firms. The analysis seeks to objectively evaluate how managerial originality and investment capability translate into performance and competitive outcomes in the industry, providing policy insights for enhancing the competitiveness of Korea’s mutual fund market. Using data from 2014 to 2024, the study quantifies the degree of portfolio differentiation for each fund, based on the overlap between its holdings and comparable ETFs. Differentiation indices are constructed by fund type (equity, bond, and fund-of-funds), and panel regression models are estimated to analyze the impact of differentiation on subsequent fund inflows and changes in asset manager market share. Control variables include fund returns, fees, commissions, and fund and firm size, while dynamic panel models (GMM estimators) are employed to address endogeneity concerns and ensure robustness. The main findings are as follows. First, greater portfolio differentiation significantly enhances fund inflows: funds with lower overlap with ETF holdings attract higher levels of new investment. Second, differentiation also contributes positively to asset managers’ market share growth. Firms that maintain distinctive portfolios—rather than replicating ETF-style compositions—show statistically significant increases in market share over time. The policy implications are clear. Promoting portfolio differentiation can strengthen the competitiveness of public mutual funds and yield positive spillover effects across the financial ecosystem. For investors, differentiation expands investment options and improves utility through better risk-return matching. For the industry, it mitigates excessive price competition and concentration in a few large firms, fostering a healthier, more diverse market structure.

Since the 2008 global financial crisis, central banks around the world have expanded their policy domains beyond the traditional mandate of price stability to encompass broader socio-economic issues such as climate change, digital currencies, and financial inclusion. This transformation demonstrates central banks' evolution into multifaceted policy institutions, but it has also raised new concerns. In particular, following the outbreak of the COVID-19 pandemic, critics argued that central banks failed to contain inflation partly because their policy capacity had become diluted as they began to act more like broad governmental agencies. Based on these concerns, this study analyzes 9,802 speeches delivered by senior officials of 25 central banks during the period 2009–2024, using natural language processing techniques to quantify the phenomenon of policy diversification and to empirically assess its implications for central banks' core mandate of inflation management. The analysis shows that central banks' policy priorities have evolved in response to changing economic circumstances and institutional environments. In the immediate aftermath of the financial crisis, speeches on financial stability accounted for nearly half of the total (excluding regional issues). However, after the global economy stabilized around 2017, references to climate change and digital currencies increased rapidly. Interestingly, differentiated priorities emerged across central banks, with the ECB focusing on climate change while the Federal Reserve concentrated on financial inclusion. Nevertheless, during the high inflation period following COVID-19, central banks returned to their core mandate, with references to monetary policy rising sharply once again. Analyzing how these shifts in policy attention affect price stability, we find that policy concentration measured using a theoretically-informed classification of nine topic categories significantly reduces inflation over the medium term (5-10 quarters). The effect of policy concentration begins to show statistical significance from the fifth quarter, reaches its peak around the seventh quarter (approximately -2.6 percentage points), and gradually diminishes thereafter. This suggests that excessive policy diversification may hinder achieving price stability objectives. Particularly in high-inflation environments, the impact of policy concentration emerges with a notable lag. No significant effect is observed for the initial six quarters, but disinflationary effects begin to appear from the seventh quarter and reach their maximum impact by the eighth quarter. This delayed response reflects the persistence of inflation expectations and the time required for central banks to rebuild credibility in high-inflation regimes. When inflation expectations have become entrenched, economic agents do not immediately trust new signals from central banks. Only when consistent and focused messages are maintained over a sustained period does credibility gradually accumulate, leading to a re-anchoring of inflation expectations. These findings underscore that the effectiveness of central bank communication is highly state-dependent and requires differentiated strategies tailored to prevailing inflation environments. In high-inflation periods, central banks must deliver strong, repetitive, and consistent messages on price stability to restore credibility—a process that requires a long-term perspective and sustained commitment. At the same time, central bank policy diversification cannot be understood simply as 'mandate drift'. In many countries, structural reforms have stalled and political actors have tended to avoid difficult decisions involving conflict resolution, thereby placing excessive expectations on central banks as independent and technically competent institutions. Moreover, when conventional monetary policy instruments are severely constrained, central banks themselves have incentives to engage more directly with structural issues, often leading to an unintended expansion of their policy domain. In conclusion, this study shows that central bank policy diversification has unfolded within an institutional context that makes such expansion almost inevitable. Nevertheless, central banks must continue to uphold a clear prioritization of their core mandate of price stability, even as they respond to diverse societal demands. To this end, carefully tailored communication strategies suited to prevailing economic conditions are essential.

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.