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In this paper, we study the trading effect of Korean pension funds on price change around index inclusions. We find that pension funds strategically respond to index composition changes, and their demand for newly included stocks is high and persistent. The liquidity providers for the demand of pension funds are individual investors. We also find the significant and positive effect of pension funds’ trading on newly included stocks’ prices following the announcement date. On the other hand, we could not find evidence of a positively persistent relationship between the trades of different types of investors and newly added stock returns. Overall, our findings highlight that the trading of pension funds can be an important explanatory factor for the index inclusion effects.

Pension Fund Trading Behavior and the Index Inclusion: Evidence from the Korean Stock Market