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Rational Attention Allocation Over the Business Cycle

  • Marcin Kacperczyk
  • Stijn Van Nieuwerburgh
  • Laura Veldkamp

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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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
Note: AP EFG
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