The Effect of NPS‘s FX Trading on Exchange Rate

Abstract

In June 2014, the asset under management of National Pension Service (NPS) of Korea reached over 444 trillion won. NPS forecasts that the asset size will gradually grow to around 2,561 trillion won until 2043. The NPS investment of domestic equities and fixed income securities have been already saturated. So the NPS started to expand in global investment. Accordingly, the worries have grown that NPS's trading in foreign exchange markets may lead to the instability in FX markets. This study has analyzed the influence of NPS's foreign exchange transactions in domestic FX market. The period of study was 54 months from Jan 2010 to June 2014. For detailed research, separate analysis was performed by full year and each year. Our main findings can be summarized as follows : There are statistically plus significant influences of the NPS’s trading volume on the estimated volatility of spot rate on the first half. However, there are minus significant influences on the second half. The NPS's FX trading is known to be systematically regulated by the financial planning of the investment committee. The result of this study shows that the regulation of the NPS’s FX trading minimizes the disturbances of the currency by maintaining the stable market expectation in FX markets.