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

51 Pages Posted: 2 Nov 2020 Last revised: 31 Jan 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 trading strategies that rebalance between stocks and bonds so as to maintain age-appropriate portfolio shares. We show that i) TDFs actively rebalance within a few months following differential asset-class returns to maintain stable portfolio shares, ii), this rebalancing drives contrarian rebalancing flows across funds held by TDFs, iii) investors do not move funds into or out of TDFs to offset these flows, and iv) these flows impact the prices of stocks. Across otherwise similar stocks, those with higher (indirect) TDF ownership experience lower returns after higher market-wide performance, a results that holds when looking only at variation in TDF ownership driven by S&P index inclusion. Consistent with this price impact, the stock market exhibits more reversion at the monthly frequency during the recent TDF era. Together, our results suggest that continued growth in TDFs may affect return dynamics and the relation between stock and bond returns.

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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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