Rational Attention Allocation over the Business Cycle

63 Pages Posted: 29 May 2009 Last revised: 15 Aug 2012

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics; National Bureau of Economic Research (NBER)

Stijn Van Nieuwerburgh

New York University Stern School of Business, Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Laura Veldkamp

New York University - Stern School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: August 14, 2012

Abstract

The literature assessing whether mutual fund managers have skill typically regards market timing or stock picking skills as immutable attributes of a manager or fund. Yet, measures of these skills appear to vary over the business cycle. This paper offers a rational explanation, arguing that timing and picking are tasks. A skilled manager can choose how much of each task to attend to. Using tools from the rational inattention literature, we show that in booms, a manger should pick stocks and in recessions, he should pay more attention to his market timing. The model predicts equilibrium outcomes in a world where a fraction of managers have skill and invest alongside unskilled investors. The predictions about funds' covariance with payoff shocks, cross-fund dispersion, and their excess returns are all supported by the data. In turn, these findings offer new evidence to support two broader ideas: that some investment managers have skill and that attention is allocated rationally.

Keywords: information choice, investment management, business cycle

JEL Classification: D8, E32, G11, G12, G14, G23

Suggested Citation

Kacperczyk, Marcin T. and Van Nieuwerburgh, Stijn and Veldkamp, Laura, Rational Attention Allocation over the Business Cycle (August 14, 2012). Available at SSRN: https://ssrn.com/abstract=1411367 or http://dx.doi.org/10.2139/ssrn.1411367

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics ( email )

South Kensington campus
London SW7 2AZ
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stijn Van Nieuwerburgh (Contact Author)

New York University Stern School of Business, Department of Finance ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Laura Veldkamp

New York University - Stern School of Business ( email )

44 West 4th St. - Suite 7-180
New York, NY 100012
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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