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Target Allocation Funds, Strategic Complementarities, and Market Fragility

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Listed:
  • Chuck Fang
  • Itay Goldstein

Abstract

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.

Suggested Citation

  • Chuck Fang & Itay Goldstein, 2025. "Target Allocation Funds, Strategic Complementarities, and Market Fragility," NBER Working Papers 34509, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34509
    Note: AP CF
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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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