NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Rational Attention Allocation Over the Business Cycle

Marcin Kacperczyk, Stijn Van Nieuwerburgh, Laura Veldkamp

NBER Working Paper No. 15450
Issued in October 2009
NBER Program(s):   AP   EFG

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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A data appendix is available at http://www.nber.org/data-appendix/w15450

This paper was revised on November 17, 2011

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w15450

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