The Price Impact of NPS in Korean Stock Market and Optimal Asset Allocation to Domestic and Foreign Stocks
Minjeong Kang
Byung-June Kim
Bong-Gyu Jang
We extend Lucas and Zeldes (2009) to a two-period model with two risky assets. We assume that investments in domestic stocks by National Pension System (NPS) have price impact while those in foreign stocks do not. We also assume NPS has a positive price impact in period one while having a negative impact in period two. By doing so we attempt to reflect two key issues facing NPS. That is, NPS is heavily invested in domestic stocks while the assets managed by it is huge (as large as 35% of Korean stock market capitalization), and it is expected to experience budget deficits leading to insolvency in the next couple of decades. Under various scenarios we provide optimal asset allocation decisions to minimize the expected utility losses caused by distortionary taxes. Our results suggest that NPS take into account price impact it can have on the Korean stock market when forming their portfolios and increase their portfolio weights in foreign stocks.