Target Allocation Funds, Strategic Complementarities, and Market Fragility

Chuck Fang and Itay Goldstein

No 34509, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G01 G12 G23 (search for similar items in EconPapers)
Date: 2025-11
New Economics Papers: this item is included in nep-fmk and nep-mac
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