Econometrica: Mar 2016, Volume 84, Issue 2

A Rational Theory of Mutual Funds' Attention Allocation

https://doi.org/10.3982/ECTA11412
p. 571-626

Marcin Kacperczyk, Stijn Van Nieuwerburgh, Laura Veldkamp

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.

Log In To View Full Content

Supplemental Material

Supplement to "A Rational Theory of Mutual Funds' Attention Allocation"

This zip file contains the replication files for the manuscript.

Read More View ZIP


Supplement to "A Rational Theory of Mutual Funds' Attention Allocation"

This supplement contains material not found within the manuscript.

Read More View PDF



Back