Retail Financial Innovation and Stock Market Dynamics: The Case of Target Date Funds
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.
Non-Technical Summaries
- In response to stock market moves, target date funds rebalance their portfolios to achieve a preset mix of stocks and bonds, thereby...
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