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Time-varying fund manager skill

  • Laura Veldkamp

    (NYU Stern)

The literature assessing whether mutual fund managers have skill typically regards skill as an immutable attribute of the manager or the fund. We show that many measures of skill, such as returns, alphas, and measures of stock-picking and market-timing, appear to vary over the business cycle. We argue that skill is a general cognitive ability that is applied to different tasks, such as picking stocks or market timing. Using tools from the rational inattention literature, the theory shows that the relative value of these tasks varies cyclically. It 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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File URL: https://www.economicdynamics.org/meetpapers/2012/paper_68.pdf
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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 68.

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Date of creation: 2012
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Handle: RePEc:red:sed012:68
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htmEmail:


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  1. Marcin Kacperczyk & Amit Seru, 2007. "Fund Manager Use of Public Information: New Evidence on Managerial Skills," Journal of Finance, American Finance Association, vol. 62(2), pages 485-528, 04.
  2. Luboš Pástor & Robert F. Stambaugh, . "Investing in Equity Mutual Funds," CRSP working papers 532, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  3. Moulton, Brent R., 1986. "Random group effects and the precision of regression estimates," Journal of Econometrics, Elsevier, vol. 32(3), pages 385-397, August.
  4. Marcin Kacperczyk & Stijn Van Nieuwerburgh & Laura Veldkamp, 2009. "Rational Attention Allocation Over the Business Cycle," NBER Working Papers 15450, National Bureau of Economic Research, Inc.
  5. Marcin Kacperczyk & Clemens Sialm & Lu Zheng, 2004. "On the Industry Concentration of Actively Managed Equity Mutual Funds," NBER Working Papers 10770, National Bureau of Economic Research, Inc.
  6. Jennifer Huang & Clemens Sialm & Hanjiang Zhang, 2009. "Risk Shifting and Mutual Fund Performance," NBER Working Papers 14903, National Bureau of Economic Research, Inc.
  7. Glode, Vincent, 2011. "Why mutual funds "underperform"," Journal of Financial Economics, Elsevier, vol. 99(3), pages 546-559, March.
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