Working Paper: NBER ID: w15450
Authors: Marcin Kacperczyk; Stijn Van Nieuwerburgh; Laura Veldkamp
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.
Keywords: mutual funds; attention allocation; business cycle; portfolio performance
JEL Codes: E3; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Business cycle state (E32) | Attention allocation to aggregate shocks (E19) |
| Business cycle state (E32) | Attention allocation to idiosyncratic shocks (J29) |
| Increased volatility of aggregate shocks in recessions (E32) | Higher covariance between fund portfolios and aggregate payoff shocks (G19) |
| Recessions (E32) | Increased dispersion of fund returns (G19) |
| Skilled managers (M54) | Outperformance of unskilled managers in recessions (D29) |