Does National Pension Service’s Trading Destabilize Korean Stock Market

서지정보

· 발행기관 : 한국증권학회
· 수록지 정보 : Asia-Pacific Journal of Financial Studies / 37권 / 3호 / 465 ~ 500페이지
· 저자명 : 고봉찬, 이병희, 이우종, 황이석

초록

This paper examines the impact of trading by the National Pension Service (NPS) on the Korean stock market. As of the end of September 2007, the NPS had invested more than 215 trillion won in the financial sector and, more notably, more than 37.6 trillion won in the Korean stock market. As the total amount of NPS funds increases, the impact these funds have on the Korean stock market is also expected to strengthen. Consequently, there is growing concern that the trading activities of the NPS may destabilize the Korean stock market, i.e., due to these specific trading activities, stock prices will periodically diverge from fundamental values and become unstable. Prior research has suggested that positive feedback trading and herding behavior may be the potential causes of such destabilization (Lakonishok et al., 1992; Sias and Starks, 1997; Cohen et al., 2002; Bekaert and Harvey, 2000; Choe et al., 1999). By utilizing NPS transaction data from 2000 to 2004, this study investigates whether the trading activities of the NPS have actually destabilized the stock market in terms of positive feedback trading and herding behavior.
We propose and test four general hypotheses to explain the effect of NPS trading on the Korean stock market. First, we examine whether the NPS conducts positive feedback trading. The fluctuation of the stock market can be widened if the NPS follows a strategy that is based on positive feedback trading. We measure the volume (amount) of purchases among the total trading volume (amount), which is denoted as BuyRatio, and examine whether there is a positive correlation with the preceding market value-weighted index.
We find, however, that during the sample period the NPS consistently showed a tendency toward net purchasing, regardless of changes in market returns.
Second, we test whether trading by the NPS is positively associated with the preceding returns of individual securities. We investigate the BuyRatio of the NPS to the preceding abnormal returns of individual securities. In addition, we regress the net purchasing volume (amount) of the NPS on the preceding returns of each security. As a result, the NPS follows a net purchasing trading pattern for individual stocks even after their security returns have fallen. Based on these results, we find that, with regard to positive feedback trading, NPS trading not only fails to have a destabilizing impact on individual securities, but also on the market as a whole.
Third, we investigate whether trades by the NPS cause variation in the returns of individual securities. An increase in the return variations of individual securities could be an indicator of destabilization. A proxy for return volatility is measured by the absolute value of a return, and we regress it on the trades made by the NPS on the current and previous days and on the other control variables. We find no evidence that trading by the NPS caused the increased volatility of individual securities during the sample period.
Finally, we examine whether trading by the NPS affects the trading behavior of other investor groups. In this analysis, investors are classified into nine groups: securities companies, insurance companies, investment trust companies, banks, investment banks, funds, government, individuals, and foreigners. If NPS trades lead the trading activities of other investor groups, then it is possible that the impact of the NPS on the stock market is strengthened by the trading activities of these other investor groups and thus that the NPS has a destabilizing effect on the stock market. We implement OLS and a bivariate VAR model to investigate the impact of trading by the NPS on the trading behavior of other investor groups, but we find no valid evidence to support this hypothesis.
In sum, we conclude that there is no valid evidence that the trading activities of the NPS have a destabilizing effect on the Korean stock market.

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