Market impact cost asymmetry of the National Pension Service and its determinant analysis

Abstract

As of March 2021, the National Pension Service (NPS) is the world’s 3rd largest pension fund with 872.5tn won (KRW) in management. Recently, the NPS proposed a policy to gradually reduce the proportion of domestic stocks in the portfolio in the future. This change in the asset allocation strategy is related to the NPS’s exit strategy for domestic stocks. This study aims to examine the market impact cost asymmetry between buys and sells of the NPS and suggest a trading strategy for mitigating the market impact cost. The results are as follows. First, there is an asymmetry between buys and sells in the market impact cost of the NPS. The market impact cost of the NPS is gradually increasing over time. In particular, the market impact cost from selling has increased significantly in recent years. Second, past returns, volatility, liquidity and trading intensity can be found as external factors affecting the asymmetric market impact cost of the NPS. Although there is no difference between the buying and selling ratios of the NPS, the market impact cost from sells is relatively higher than that from buys. Third, after controlling for the order execution size of the NPS, the longer the trade execution period, the lower the market impact cost. This result implies that the strategy of splitting orders as a way to reduce the market impact cost is effective. The trading behavior of the NPS directly or indirectly affects other investors. If the sell of the NPS incurs excessive market impact cost, the negative impact on the stock price will be further exacerbated. Therefore, it is necessary for the NPS to reduce the market impact cost through split trading in executing orders in the domestic stock market. Findings of this study provide implications for countermeasures and long-term management strategies that can minimize the market impact cost of the NPS in the process of reducing the proportion of domestic stocks in the future.