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Rational Attention Allocation Over the Business Cycle

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  • Marcin Kacperczyk
  • Stijn Van Nieuwerburgh
  • Laura Veldkamp

Abstract

The literature assessing whether mutual fund managers have skill typically regards skill as an immutable attribute of the manager or the fund. Yet, many measures of skill, such as returns, alphas, and measures of stock-picking and market-timing, appear to vary over the business cycle. Because time-varying ability seems far-fetched, these results call into question the existence of skill itself. This paper offers a rational explanation, arguing that skill is a general cognitive ability that can be applied to different tasks, such as picking stocks or market timing. Using tools from the rational inattention literature, we show that the relative value of these tasks varies cyclically. The model generates indirect predictions for the dispersion and returns of fund portfolios that distinguish this explanation from others and which are supported by the data. In turn, these findings offer useful evidence to support the notion of rational attention allocation.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15450.

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Date of creation: Oct 2009
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Handle: RePEc:nbr:nberwo:15450

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Citations

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Cited by:
  1. Agarwal, Vikas & Gómez, Juan-Pedro & Priestley, Richard, 2011. "Management compensation and market timing under portfolio constraints," CFR Working Papers 11-16, University of Cologne, Centre for Financial Research (CFR).
  2. Kacperczyk, Marcin & van Nieuwerburgh, Stijn & Veldkamp, Laura, 2012. "Time-Varying Fund Manager Skill," CEPR Discussion Papers 9025, C.E.P.R. Discussion Papers.
  3. Kuhnen, Camelia M., 2012. "Asymmetric learning from financial information," MPRA Paper 39412, University Library of Munich, Germany.
  4. Ron Kaniel & Péter Kondor, 2013. "The Delegated Lucas Tree," Review of Financial Studies, Society for Financial Studies, vol. 26(4), pages 929-984.
  5. Mackowiak, Bartosz Adam & Wiederholt, Mirko, 2011. "Inattention to Rare Events," CEPR Discussion Papers 8626, C.E.P.R. Discussion Papers.
  6. Marcin Kacperczyk & Philipp Schnabl, 2009. "When Safe Proved Risky: Commercial Paper During the Financial Crisis of 2007-2009," NBER Working Papers 15538, National Bureau of Economic Research, Inc.
  7. Chang, Kuang-Liang & Chen, Nan-Kuang & Leung, Charles Ka Yui, 2012. "The dynamics of housing returns in Singapore: How important are the international transmission mechanisms?," Regional Science and Urban Economics, Elsevier, vol. 42(3), pages 516-530.
  8. Nina Boyarchenko, 2012. "Information acquisition and financial intermediation," Staff Reports 571, Federal Reserve Bank of New York.
  9. Maćkowiak, Bartosz & Wiederholt, Mirko, 2011. "Business cycle dynamics under rational inattention," Working Paper Series 1331, European Central Bank.

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