National Pension Fund and Stock Liquidity: Evidence from Korea
By Eunyoung Cho & Cheol-Won Yang
We investigate the impact of the national pension’s trading on individual stock liquidity. While prior research has primarily focused on the effects of national pension funds on market performance or volatility, this paper shifts attention to liquidity, a relatively underexplored dimension of market quality. Utilizing detailed transaction-level data from the National Pension Service (NPS) of Korea between 2010 and 2019, we assess the relationship between NPS trading activity and stock liquidity by employing both regression analysis and difference-in-differences (DiD) approach. Our findings reveal that NPS trading significantly improves liquidity, particularly for stocks newly added to its benchmark index. This effect is primarily driven by the fund’s outsourced management segment. Further analysis shows that the liquidity enhancement stems from a reduction in price impact rather than increased trading volume. Additionally, NPS’s disclosure of stake holding is followed by increased retail investor purchases and liquidity improvements, suggesting a channel of influence through heightened investor attention. These findings underscore the NPS’s role as a market maker and liquidity provider in the Korean stock market and offer implications for understanding how large pension funds can shape financial market development.
Source SSRN
