Target Allocation Funds, Strategic Complementarities, and Market Fragility / Chuck Fang, Itay Goldstein.

Format:

Book

Author/Creator:

Fang, Chuck.

Contributor:

Goldstein, Itay.

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w34509.

NBER working paper series no. w34509

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2025.

Summary:

Target allocation funds (TAFs) make predictable rebalancing trades to maintain portfolio weights across asset classes. During the COVID-19 stock market crash, TAFs sold $59 billion of bond fund shares and simultaneously purchased a similar amount of equity fund shares. We show that TAF rebalancing triggers strategic complementarity: bond mutual funds facing larger rebalancing-induced sales by TAFs experienced greater outflows from other non-TAF investors. This effect was particularly pronounced for illiquid bond funds and amplified total bond fund outflows during COVID-19 by an additional $27 billion. Rebalancing by TAFs, together with the strategic amplification by other investors, transmits equity market shocks to bond returns, accounting for 17% of the rise in stock-bond correlation over the past decade.

Notes:

November 2025.

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