Working Paper: NBER ID: w28028
Authors: Jonathan A. Parker; Antoinette Schoar; Yang Sun
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.
Keywords: target date funds; retail financial innovation; stock market dynamics; investor behavior
JEL Codes: G12; G23; G51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| TDFs sell equities (G12) | TDFs buy fixed income mutual funds (G23) |
| TDF ownership in equity mutual funds (G23) | stabilize fund flows (F32) |
| TDFs' contrarian trading (G19) | dampens stock market price responsiveness (G10) |
| TDF rebalancing behavior (F32) | lower returns for stocks held disproportionately (G12) |
| TDF ownership (Y10) | lower net inflows for equity mutual funds (F21) |