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