Retail Financial Innovation and Stock Market Dynamics: The Case of Target Date Funds

61 Pages Posted: 2 Nov 2020 Last revised: 10 Aug 2022

See all articles by Jonathan A. Parker

Jonathan A. Parker

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Yang Sun

Brandeis University- International Business School

Date Written: October 2020

Abstract

Target Date Funds (TDFs) are designed to provide unsophisticated or inattentive investors with age-appropriate exposures to different asset classes like stocks and bonds. The rise of TDFs has moved a significant share of retirement investors into macro-contrarian strategies that sell stocks after relatively good stock market performance. This rebalancing drives contrarian flows across equity mutual funds held by TDFs, stabilizing their funding, and reduces stock returns for stocks disproportionately held by these funds when stock market returns are relatively high. Continued growth in TDFs and similar investment products may dampen stock market volatility and increase the transmission of shocks across asset classes.

Suggested Citation

Parker, Jonathan A. and Schoar, Antoinette and Sun, Yang, Retail Financial Innovation and Stock Market Dynamics: The Case of Target Date Funds (October 2020). NBER Working Paper No. w28028, Available at SSRN: https://ssrn.com/abstract=3723265

Jonathan A. Parker (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Yang Sun

Brandeis University- International Business School ( email )

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