Transactions of the National Pension Service of Korea in the KOSPI200 futures market

Meong Ae Kim,Mincheol Woo

doi:10.1108/jdqs-11-2020-0030

Meong Ae Kim, Mincheol Woo

Open Access

https://doi.org/10.1108/jdqs-11-2020-0030

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Abstract

It is known that the National Pension Service (NPS) of Korea contributes to the market stability because it tends to pursue the negative feedback trading strategy in the Korean stock market. While many studies deal with institutional investors’ trading in the financial derivatives market, the NPS’s trading in the derivatives market is rarely studied. Using the NPS’s trading data for the period from January 2010 to March, 2020, the authors examine the transactions of the NPS in the KOSPI200 futures market. We find that the NPS’s net investment flow (NIF) in KOSPI200 futures is negatively associated with the past returns of KOSPI200 futures and the KOPI200 index. However, we also find that the NPS’s NIF of KOSPI200 futures is positively associated with its NIF in KOSPI200 stocks. Along with the legal restriction on the NPS’s trading in the derivatives market, the result suggests that the NPS uses KOSPI200 futures to deviate the problems related to non-synchronous trading in the spot market. To the best of our knowledge, this paper is the first study of the NPS’s transactions of KOSPI200 futures. The paper suggests that the NPS does not trade KOSPI200 futures for hedging or arbitrage profit but for complementing its transactions in the spot market of KOSPI200 stocks.

Highlights

The National Pension Service (NPS) of Korea is considered as an institutional investor with the largest influence in the Korean stock market
Using the measure of net investment flow (NIF), we investigate whether the NPS shows the feedback trading behavior against the past returns of KOSPI200 futures, which are measured as the cumulative abnormal returns (CAR)
We investigate whether the relationship between the NPS’s NIF and the CARs of KOSPI200 futures changes across the different lengths of the window for CAR

Summary

Introduction

The National Pension Service (NPS) of Korea is considered as an institutional investor with the largest influence in the Korean stock market. Considering that the NPS is not allowed to trade derivatives for the speculative purpose in principle [1], we further examine whether the NPS’s trading of KOSPI200 futures is to pursue a certain investment strategy in the futures market or is related to the NPS’s transactions in the spot market. This paper, to the best of the authors’ knowledge, is the first study that examines the NPS’s trading of KOSPI200 futures It contributes to the literature of large institutional investors’ roles in the Korean stock market by adding evidence of the NPS’s trading behavior in the Korean index futures market. 3. Data and methodology 3.1 Data In this study, the NPS’s trading of KOSPI200 stocks in the spot market and KOSPI200 futures are tracked through the transaction documents of Korea Exchange, as in Woo and Kim (2018).

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Findings

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