Rational Attention Allocation Over the Business Cycle

54 Pages Posted: 3 Nov 2009 Last revised: 21 Mar 2021

See all articles by Marcin T. Kacperczyk

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics; Centre for Economic Policy Research (CEPR)

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); ABFER; New York University (NYU)

Laura Veldkamp

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: October 2009

Abstract

The question of whether and how mutual fund managers provide valuable services for their clients motivates one of the largest literatures in finance. One candidate explanation is that funds process information about future asset values and use that information to invest in high-valued assets. But formal theories are scarce because information choice models with many assets are difficult to solve as well as difficult to test. This paper tackles both problems by developing a new attention allocation model that uses the state of the business cycle to predict information choices, which in turn, predict observable patterns of portfolio investments and returns. The predictions about fund portfolios’ covariance with payoff shocks, cross-fund portfolio and return dispersion, and their excess returns are all supported by the data. These findings offer new evidence that some investment managers have skill and that attention is allocated rationally.

Suggested Citation

Kacperczyk, Marcin T. and Van Nieuwerburgh, Stijn and Veldkamp, Laura, Rational Attention Allocation Over the Business Cycle (October 2009). NBER Working Paper No. w15450, Available at SSRN: https://ssrn.com/abstract=1498951

Marcin T. Kacperczyk (Contact Author)

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

South Kensington campus
London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business ( email )

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Laura Veldkamp

Columbia University - Columbia Business School ( email )

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United States

National Bureau of Economic Research (NBER)

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