Diagnosis of Investment Behaviors of Occupational Defined Benefit(DB) Funds in Korea Using a Liability Driven Investment (LDI) Approach

28 Pages Posted: 3 Jul 2018 Last revised: 9 Jan 2019

See all articles by Do Young Cheong

Do Young Cheong

Kyobo AXA Investment Managers

Joo-Ho Sung

Kyung-Hee University

Date Written: June 29, 2018

Abstract

The financial market instability and the changes in international accounting standards on employee benefits lead to a growing interest in Asset-Liability Management(ALM) in the field of occupational Defined Benefit(DB) funds. However, DB funds in Korea have been mostly invested in interest guaranteed products(such as deposits) regardless of ALM. In order to examine the current investment behaviors of DB funds in Korea, we propose different portfolio strategies on each of asset-only space and asset-liability space. We find that the maximum Sharpe ratio Portfolio(MSP) is able to explain the investment behaviours of Korea DB funds in terms of asset-only strategy. On the other hand, we find out that the Liability Driven Investment(LDI) portfolio which consist of the minimum surplus variance portforio(MSVP) and the maximum surplus Sharpe ratio portfolio(MSSP) is likely to be the more recommendable asset-liability strategy on grounds that it is empirically tested to enhance contribution stability and benefit security simultaneously. Lastly, we hope that this paper could provide a momentum changing the current investment behaviors of DB sponsors in Korea and it will also contribute to the stabilization of financial market through the vitalizations of capital market as a consequence.

Keywords: Defined Benefit(DB) Pension Plan, Asset Liability Management(ALM), Liability Driven Investment(LDI), Asset Allocation, Mean Variance Model

JEL Classification: J32

Suggested Citation

Cheong, Do Young and Sung, Joo-Ho, Diagnosis of Investment Behaviors of Occupational Defined Benefit(DB) Funds in Korea Using a Liability Driven Investment (LDI) Approach (June 29, 2018). Financial Stability Studies, Vol. 19, No. 1, Korea Deposit Insurance Corporation(KDIC), 2018, pp. 39-66.. Available at SSRN: https://ssrn.com/abstract=3204990 or http://dx.doi.org/10.2139/ssrn.3204990

Do Young Cheong (Contact Author)

Kyobo AXA Investment Managers ( email )

No Address Available

Joo-Ho Sung

Kyung-Hee University ( email )

Dongdaemun-ku
Seoul, Gyeonggi-Do 446-701

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