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

60 Pages Posted: 2 Nov 2020 Last revised: 22 Aug 2021

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

The rise of Target Date Funds (TDFs) has moved a significant share of retail investors into contrarian strategies that rebalance between stocks and bonds to maintain age-appropriate portfolio shares. We show that i) TDFs actively rebalance within a few months following differential asset-class returns according to mandate, ii), this rebalancing drives contrarian flows across funds held by TDFs, and iii) these flows affect stock returns: stocks with greater (indirect) TDF ownership have lower risk-adjusted returns when equity outperforms bonds and vice versa. Continued growth in TDFs may dampen stock market volatility and increase the transmission of shocks across asset classes.

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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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Yang Sun

Brandeis University- International Business School ( email )

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