Showing papers by "National Bureau of Economic Research published in 2015"
28 Jun 2015
TL;DR: In this paper, the cross-sectional properties of return forecasts derived from Fama-MacBeth regressions were studied, and the authors found that the forecasts vary substantially across stocks and have strong predictive power for actual returns.
Abstract: This paper studies the cross-sectional properties of return forecasts derived from Fama-MacBeth regressions. These forecasts mimic how an investor could, in real time, combine many firm characteristics to obtain a composite estimate of a stockâs expected return. Empirically, the forecasts vary substantially across stocks and have strong predictive power for actual returns. For example, using ten-year rolling estimates of Fama- MacBeth slopes and a cross-sectional model with 15 firm characteristics (all based on low-frequency data), the expected-return estimates have a cross-sectional standard deviation of 0.87% monthly and a predictive slope for future monthly returns of 0.74, with a standard error of 0.07.
4,406 citations
TL;DR: In this paper, the authors argue that the global financial cycle is not aligned with countries' specific macroeconomic conditions and propose a convex combination of targeted capital control, macroprudential control, and stricter limit on leverage for all financial intermediaries.
Abstract: There is a global financial cycle in capital flows, asset prices and in credit growth. This cycle co‐moves with the VIX, a measure of uncertainty and risk aversion of the markets. Asset markets in countries with more credit inflows are more sensitive to the global cycle. The global financial cycle is not aligned with countries’ specific macroeconomic conditions. Symp toms can go from benign to large asset price bubbles and excess credit creation, which are among the best predictors of financial crises. A VAR analysis suggests that one of the determinants of the global financial cycle is monetary policy in the centre country , which affects leverage of global banks, capital flows and credit growth in the international financial system. Whenever capital is freely mobile, the global financial cycle constrains national monetary policies regardless of the exchange rate regime. For the past few decades, international macroeconomics has postulated the “trilemma”: with free capital mobility, inde pendent monetary policies are feasible if and only if exchange rates are floating. The global financial cycle transforms the trilemma into a “dilemma” or an “irreconcilable duo”: independent monetary policies are possible if and only if the capital account is managed. So should policy restrict capital mobility? Gains to international capital flows have proved elusive whether in calibrated models or in the data. Large gross flows disrupt asset markets and financial intermediation, so the costs may be very large. To deal with the global financial cycle and the “dilemma”, we have the following policy options: ( a) targeted capital controls; (b) acting on one of the sources of the financial cyc le itself, the monetary policy of the Fed and other main central banks; (c) acting on the transmission channel cyclically by limiting credit growth and leverage during the upturn of the cycle, using national macroprudential policies; (d) acting on the transmission channel structurally by imposing stricter limit s on leverage for all financial intermediaries. We argue for a convex combination of (a), (c) and (d).
1,428 citations
TL;DR: Overall economic productivity is non-linear in temperature for all countries, with productivity peaking at an annual average temperature of 13 °C and declining strongly at higher temperatures, which provides the first evidence that economic activity in all regions is coupled to the global climate.
Abstract: Economic productivity is shown to peak at an annual average temperature of 13 °C and decline at high temperatures, indicating that climate change is expected to lower global incomes more than 20% by 2100. Temperature, and therefore climate change, can affect a country's economic productivity, but it has not been clear if rich and poor countries, or different aspects of economic productivity, show similar relationships. These authors use economic data from 166 countries for the years 1960 to 2010 to uncover a universal nonlinear relationship that reconciles earlier results. Economic productivity peaks at an annual average temperature of 13 °C, and the authors explore the likelihood of global economic contraction under future warming scenarios. Growing evidence demonstrates that climatic conditions can have a profound impact on the functioning of modern human societies1,2, but effects on economic activity appear inconsistent. Fundamental productive elements of modern economies, such as workers and crops, exhibit highly non-linear responses to local temperature even in wealthy countries3,4. In contrast, aggregate macroeconomic productivity of entire wealthy countries is reported not to respond to temperature5, while poor countries respond only linearly5,6. Resolving this conflict between micro and macro observations is critical to understanding the role of wealth in coupled human–natural systems7,8 and to anticipating the global impact of climate change9,10. Here we unify these seemingly contradictory results by accounting for non-linearity at the macro scale. We show that overall economic productivity is non-linear in temperature for all countries, with productivity peaking at an annual average temperature of 13 °C and declining strongly at higher temperatures. The relationship is globally generalizable, unchanged since 1960, and apparent for agricultural and non-agricultural activity in both rich and poor countries. These results provide the first evidence that economic activity in all regions is coupled to the global climate and establish a new empirical foundation for modelling economic loss in response to climate change11,12, with important implications. If future adaptation mimics past adaptation, unmitigated warming is expected to reshape the global economy by reducing average global incomes roughly 23% by 2100 and widening global income inequality, relative to scenarios without climate change. In contrast to prior estimates, expected global losses are approximately linear in global mean temperature, with median losses many times larger than leading models indicate.
1,320 citations
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TL;DR: A discussion forum based around Thomas Piketty's book, Capital in the twenty-first century, with a number of economists from academia, public sector bodies and private sector institutions was held at the Centre for Economic Policy Research and the Bank of England.
Abstract: On 19 December 2014, the Centre for Economic Policy Research and the Bank of England hosted a discussion forum based around Thomas Piketty’s book, Capital in the twenty-first century, with a number of economists from academia, public sector bodies and private sector institutions. Four speakers presented research on various issues relating to inequality, including: access to education; wealth and taxation policy; and the role of governance and institutions. This article presents each speaker’s key arguments, and includes a summary of the open-floor debate that followed.
1,286 citations
TL;DR: An empirical q-factor model consisting of the market factor, a size factor, an investment factor, and a profitability factor largely summarizes the cross section of average stock returns as mentioned in this paper, and with a few exceptions, the Q-Factor model's performance is at least comparable to, and in many cases better than that of the Fama-French (1993) 3 factor model and the Carhart (1997) 4 factor model in capturing the remaining significant anomalies.
Abstract: An empirical q-factor model consisting of the market factor, a size factor, an investment factor, and a profitability factor largely summarizes the cross section of average stock returns. A comprehensive examination of nearly 80 anomalies reveals that about one-half of the anomalies are insignificant in the broad cross section. More importantly, with a few exceptions, the q-factor model's performance is at least comparable to, and in many cases better than that of the Fama-French (1993) 3-factor model and the Carhart (1997) 4-factor model in capturing the remaining significant anomalies.
1,125 citations
TL;DR: This paper employed an approximation that makes a nonlinear term structure model extremely tractable for analysis of an economy operating near the zero lower bound for interest rates, which can be used to summarize the macroeconomic effects of unconventional monetary policy.
Abstract: This paper employs an approximation that makes a nonlinear term structure model extremely tractable for analysis of an economy operating near the zero lower bound for interest rates. We show that such a model offers an excellent description of the data compared to the benchmark model and can be used to summarize the macroeconomic effects of unconventional monetary policy. Our estimates imply that the efforts by the Federal Reserve to stimulate the economy since July 2009 succeeded in making the unemployment rate in December 2013 1% lower, which is 0.13% more compared to the historical behavior of the Fed.
847 citations
TL;DR: A five-factor model that adds profitability and investment factors to the three factor model of Fama and French (1993) largely absorbs the patterns in average returns is proposed in this article, which fails to capture fully the low average returns of small stocks whose returns behave like those of low profitability firms that invest aggressively.
Abstract: Average stock returns for North America, Europe, and Asia Pacific increase with the book-to-market ratio (B/M) and profitability and are negatively related to investment. For Japan the relation between average returns and B/M is strong, but average returns show little relation to profitability or investment. A five-factor model that adds profitability and investment factors to the three-factor model of Fama and French (1993) largely absorbs the patterns in average returns. As in Fama and French (2015a,b), the model’s prime problem is failure to capture fully the low average returns of small stocks whose returns behave like those of low profitability firms that invest aggressively.
612 citations
TL;DR: In this paper, a five-factor model that adds profitability (RMW) and investment (CMA) factors to the three factor model of Fama and French (1993) suggests a shared story for several average-return anomalies.
Abstract: A five-factor model that adds profitability (RMW) and investment (CMA) factors to the three-factor model of Fama and French (1993) suggests a shared story for several average-return anomalies. Specifically, positive exposures to RMW and CMA (returns that behave like those of the stocks of profitable firms that invest conservatively) capture the high average returns associated with low market β, share repurchases, and low stock return volatility. Conversely, negative RMW and CMA slopes (like those of relatively unprofitable firms that invest aggressively) help explain the low average stock returns associated with high β, large share issues, and highly volatile returns.
605 citations
TL;DR: The authors proposed a new explanation for the absence of disinflation during the Great Recession and found popular explanations to be insufficient, and proposed an explanation for this puzzle within the context of a standard Phillips curve.
Abstract: We evaluate explanations for the absence of disinflation during the Great Recession and find popular explanations to be insufficient. We propose a new explanation for this puzzle within the context of a standard Phillips curve. If firms’ inflation expectations track those of households, then the missing disinflation can be explained by the rise in their inflation expectations between 2009 and 2011. We present new econometric and survey evidence consistent with firms having similar expectations as households. The rise in household inflation expectations from 2009 to 2011 can be explained by the increase in oil prices over this time period. (JEL D84, E24, E32, E52, E58, Q35)
559 citations
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TL;DR: This article found that deviations from moderate temperatures and precipitation patterns systematically increase conflict risk, with each 1σ increase in temperature increasing interpersonal conflict by 2.4% and intergroup conflict by 11.3%.
Abstract: We review the emerging literature on climate and conflict. We consider multiple types of human conflict, including both interpersonal conflict, such as assault and murder, and intergroup conflict, including riots and civil war. We discuss key methodological issues in estimating causal relationships and largely focus on natural experiments that exploit variation in climate over time. Using a hierarchical meta-analysis that allows us to both estimate the mean effect and quantify the degree of variability across 55 studies, we find that deviations from moderate temperatures and precipitation patterns systematically increase conflict risk. Contemporaneous temperature has the largest average impact, with each 1σ increase in temperature increasing interpersonal conflict by 2.4% and intergroup conflict by 11.3%. We conclude by highlighting research priorities, including a better understanding of the mechanisms linking climate to conflict, societies’ ability to adapt to climatic changes, and the likely impacts of...
426 citations
TL;DR: The twopm command allows the user to leverage the capabilities of predict and margins to calculate predictions and marginal effects and their standard errors from the combined first- and second-part models.
Abstract: In this article, we describe twopm, a command for fitting two-part models for mixed discrete-continuous outcomes. In the two-part model, a binary choice model is fit for the probability of observing a positive-versus-zero outcome. Then, conditional on a positive outcome, an appropriate regression model is fit for the positive outcome. The twopm command allows the user to leverage the capabilities of predict and margins to calculate predictions and marginal effects and their standard errors from the combined first- and second-part models.
TL;DR: This paper examined the temperature-mortality relationship over the course of the 20th century US both for its own interest and to identify potentially useful adaptations for coming decades There are three primary findings First, the mortality impact of days with mean temperature exceeding 80° F declined by 75% Almost the entire decline occurred after 1960 Second, the diffusion of residential air conditioning (AC) explains essentially the entire drop in hot day related fatalities Third, using Dubin-McFadden's discrete-continuous model, the present value of US consumer surplus from the introduction of residential AC is estimated to be $85
Abstract: This paper examines the temperature-mortality relationship over the course of the 20th century US both for its own interest and to identify potentially useful adaptations for coming decades There are three primary findings First, the mortality impact of days with mean temperature exceeding 80° F declined by 75% Almost the entire decline occurred after 1960 Second, the diffusion of residential air conditioning (AC) explains essentially the entire decline in hot day related fatalities Third, using Dubin-McFadden’s discrete-continuous model, the present value of US consumer surplus from the introduction of residential AC is estimated to be $85 to $188 billion ($2012)
TL;DR: High-quality microdata from Mexico is used to characterize empirically the relationship between temperature, income, and air conditioning, and how climate and income drive air conditioning adoption decisions, and to forecast future energy consumption.
Abstract: As household incomes rise around the world and global temperatures go up, the use of air conditioning is poised to increase dramatically. Air conditioning growth is expected to be particularly strong in middle-income countries, but direct empirical evidence is scarce. In this paper we use high-quality microdata from Mexico to describe the relationship between temperature, income, and air conditioning. We describe both how electricity consumption increases with temperature given current levels of air conditioning, and how climate and income drive air conditioning adoption decisions. We then combine these estimates with predicted end-of-century temperature changes to forecast future energy consumption. Under conservative assumptions about household income, our model predicts near-universal saturation of air conditioning in all warm areas within just a few decades. Temperature increases contribute to this surge in adoption, but income growth by itself explains most of the increase. What this will mean for electricity consumption and carbon dioxide emissions depends on the pace of technological change. Continued advances in energy efficiency or the development of new cooling technologies could reduce the energy consumption impacts. Similarly, growth in low-carbon electricity generation could mitigate the increases in carbon dioxide emissions. However, the paper illustrates the enormous potential impacts in this sector, highlighting the importance of future research on adaptation and underscoring the urgent need for global action on climate change.
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TL;DR: In this paper, the primary function of peer-to-peer markets is to make it easy for buyers to find sellers and engage in convenient, trustworthy transactions, and the economic arguments for different approaches to licensing and certification, data, and employment regulation.
Abstract: Peer-to-peer markets such as eBay, Uber, and Airbnb allow small suppliers to compete with traditional providers of goods or services. We view the primary function of these markets as making it easy for buyers to find sellers and engage in convenient, trustworthy transactions. We discuss elements of market design that make this possible, including search and matching algorithms, pricing, and reputation systems. We then develop a simple model of how these markets enable entry by small or flexible suppliers, and the resulting impact on existing firms. Finally, we consider the regulation of peer-to-peer markets, and the economic arguments for different approaches to licensing and certification, data, and employment regulation.
TL;DR: In this paper, the authors used the value that a mutual fund extracts from capital markets as the measure of skill, and found that the average mutual fund has used this skill to generate about $3.2 million per year.
TL;DR: It is suggested that crowdfunding can play an important role in complementing expert decisions, particularly in sectors where the crowds are end users, by allowing projects the option to receive multiple evaluations and thereby lowering the incidence of "false negatives."
Abstract: In fields as diverse as technology entrepreneurship and the arts, crowds of interested stakeholders are increasingly responsible for deciding which innovations to fund, a privilege that was previously reserved for a few experts, such as venture capitalists and grant‐making bodies. Little is known about the degree to which the crowd differs from experts in judging which ideas to fund, and, indeed, whether the crowd is even rational in making funding decisions. Drawing on a panel of national experts and comprehensive data from the largest crowdfunding site, we examine funding decisions for proposed theater projects, a category where expert and crowd preferences might be expected to differ greatly. We instead find significant agreement between the funding decisions of crowds and experts. Where crowds and experts disagree, it is far more likely to be a case where the crowd is willing to fund projects that experts may not. Examining the outcomes of these projects, we find no quantitative or qualitative differences between projects funded by the crowd alone, and those that were selected by both the crowd and experts. Our findings suggest that crowdfunding can play an important role in complementing expert decisions, particularly in sectors where the crowds are end users, by allowing projects the option to receive multiple evaluations and thereby lowering the incidence of "false negatives."
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TL;DR: This article found that sharp higher uncertainty about real economic activity in recessions is fully an endogenous response to other shocks that cause business cycle fluctuations, while uncertainty about financial markets is a likely source of the fluctuations.
Abstract: Uncertainty about the future rises in recessions. But is uncertainty a source of business cycle fluctuations or an endogenous response to them, and does the type of uncertainty matter? We find that sharply higher uncertainty about real economic activity in recessions is fully an endogenous response to other shocks that cause business cycle fluctuations, while uncertainty about financial markets is a likely source of the fluctuations. Financial market uncertainty has quantitatively large negative consequences for several measures of real activity including employment, production, and a broad real activity index. Such are the main conclusions drawn from estimation of three-variable structural vector autoregressions (SVAR). To establish dynamic causal effects, we exploit information from external variables and the timing of extraordinary economic events to identify the SVAR under credible interpretations of the structural shocks.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
TL;DR: In this paper, the authors investigate the price impact of hospital mergers by formulating and estimating an equilibrium bargaining model between hospital systems and managed care health insurers over prices for inpatient services.
Abstract: In recent years, many hospitals have merged, in part to gain bargaining leverage with managed care organizations (MCOs). We investigate the price impact of hospital mergers by formulating and estimating an equilibrium bargaining model between hospital systems and managed care health insurers over prices for inpatient services. We estimate the parameters of the model using claims and discharge data from Northern Virginia. In 2006, Inova Health System proposed to acquire Prince William Hospital. We nd that this merger would have raised prices signicantly and that the remedy of separate bargaining imposed by the FTC in a separate hospital case would have resulted in a larger price increase.
TL;DR: In this paper, the authors developed a quantitative model of internal city structure that features agglomeration and dispersion forces and an arbitrary number of heterogeneous city blocks, which can account both qualitatively and quantitatively for the observed changes in city structure.
Abstract: This paper develops a quantitative model of internal city structure that features agglomeration and dispersion forces and an arbitrary number of heterogeneous city blocks. The model remains tractable and amenable to empirical analysis because of stochastic shocks to commuting decisions, which yield a gravity equation for commuting flows. To structurally estimate agglomeration and dispersion forces, we use data on thousands of city blocks in Berlin for 1936, 1986, and 2006 and exogenous variation from the city's division and reunification. We estimate substantial and highly localized production and residential externalities. We show that the model with the estimated agglomeration parameters can account both qualitatively and quantitatively for the observed changes in city structure. We show how our quantitative framework can be used to undertake counterfactuals for changes in the organization of economic activity within cities in response, for example, to changes in the transport network.
TL;DR: MMLs have no discernible impact on drinking behavior for those aged 12-20, or the use of other psychoactive substances in either age group, but increase in the probability of current marijuana use, regular marijuana use and marijuana abuse/dependence among those aged 21 or above.
TL;DR: Over the 1976-2010 period, total mortality shifted from strongly procyclical to being weakly or unrelated to macroeconomic conditions, and countercyclical patterns have emerged for fatalities from cancer mortality and external causes.
TL;DR: In this paper, the authors analyze the new varieties of state capitalism in the 21st century and explore their implications in terms of both strategic and governance outcomes, and discuss how the current theoretical perspectives conceptualize state-owned enterprises' strategic behavior.
Abstract: We analyze the new varieties of state capitalism in the 21st century and explore their implications in terms of both strategic and governance outcomes. We begin by discussing how the current theoretical perspectives conceptualize state-owned enterprises' strategic behavior. Then we introduce a stylized distinction between four broad, new varieties of state capitalism—wholly owned state-owned enterprises, the state as a majority investor, the state as a minority investor, and the state as a strategic supporter of specific sectors—and survey each type within the different theoretical perspectives. Last, we examine firm performance for each type of state capitalism relative to private firms and contingent on country-level institutional contingencies. This article contributes to existing debates on comparative capitalisms and the current role of the state.
TL;DR: In this article, the authors evaluate a large collection of systemic risk measures based on their ability to predict macroeconomic downturns and propose dimension reduction estimators for constructing systemic risk indexes from the cross section of measures and prove their consistency in a factor model setting.
Abstract: This article evaluates a large collection of systemic risk measures based on their ability to predict macroeconomic downturns. We evaluate 19 measures of systemic risk in the US and Europe spanning several decades. We propose dimension reduction estimators for constructing systemic risk indexes from the cross section of measures and prove their consistency in a factor model setting. Empirically, systemic risk indexes provide significant predictive information out-of-sample for the lower tail of future macroeconomic shocks.
TL;DR: In this article, the authors present experimental evidence on the impact of a school choice program in the Indian state of Andhra Pradesh that provided students with a voucher to finance attending a private school of their choice.
Abstract: We present experimental evidence on the impact of a school choice program in the Indian state of Andhra Pradesh that provided students with a voucher to finance attending a private school of their choice. The study design featured a unique two-stage lottery-based allocation of vouchers that created both student-level and market-level experiments, which allows us to study the individual and the aggregate effects of school choice (including spillovers). After two and four years of the program, we find no difference between test scores of lottery winners and losers on Telugu (native language), math, English, and science/social studies, suggesting that the large cross-sectional differences in test scores across public and private schools mostly reflect omitted variables. However, private schools also teach Hindi, which is not taught by the public schools, and lottery winners have much higher test scores in Hindi. Furthermore, the mean cost per student in the private schools in our sample was less than a third of the cost in public schools. Thus, private schools in this setting deliver slightly better test score gains than their public counterparts (better on Hindi and same in other subjects), and do so at a substantially lower cost per student. Finally, we find no evidence of spillovers on public school students who do not apply for the voucher, or on private school students, suggesting that the positive effects on voucher winners did not come at the expense of other students. JEL Codes: C93, H44, H52, I21, O15.
TL;DR: In this article, the introduction of electronic voting technology in Brazilian elections was studied, and it was found that electronic voting reduced residual (error-ridden and uncounted) votes and promoted a large de facto enfranchisement of mainly less educated citizens.
Abstract: This paper studies the introduction of electronic voting technology in Brazilian elections. Estimates exploiting a regression discontinuity design indicate that electronic voting reduced residual (error-ridden and uncounted) votes and promoted a large de facto enfranchisement of mainly less educated citizens. Estimates exploiting the unique pattern of the technology's phase-in across states over time suggest that, as predicted by political economy models, it shifted government spending toward health care, which is particularly beneficial to the poor. Positive effects on both the utilization of health services (prenatal visits) and newborn health (low-weight births) are also found for less educated mothers, but not for the more educated.
TL;DR: In this article, the authors estimate the effects of instructional time on students' achievement using PISA 2006 data, which include data samples from over 50 countries and find that instructional time has a positive and significant effect on test scores, and that the effect is much lower in developing countries.
Abstract: The time that children spend in school varies across countries. Do these differences explain international gaps in pupils' academic achievements? In this article I estimate the effects of instructional time on students' achievement using PISA 2006 data, which include data samples from over 50 countries. I find that instructional time has a positive and significant effect on test scores, and that the effect is much lower in developing countries. Evidence also suggests that the productivity of instructional time is higher in countries which implemented school accountability measures or that gave schools autonomy in budgetary decisions and in hiring/firing teachers.
TL;DR: In this article, the authors explore two issues triggered by the global financial crisis and find that a high proportion of them have been followed by lower output or even lower growth, suggesting a breakdown of the relation between inflation and activity.
Abstract: We explore two issues triggered by the global financial crisis. First, in most advanced countries, output remains far below the pre-recession trend, suggesting hysteresis. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. To examine the first, we look at 122 recessions over the past 50 years in 23 countries. We find that a high proportion of them have been followed by lower output or even lower growth. To examine the second, we estimate a Phillips curve relation over the past 50 years for 20 countries. We find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s but has remained roughly stable since then. We draw implications of our findings for monetary policy.
TL;DR: In this paper, the authors conducted a comprehensive empirical investigation, examining a long five-year window following activist interventions, and found no evidence that the initial positive stock-price spike accompanying activist interventions tends to be followed by negative abnormal returns in the long term; the evidence is consistent with the initial spike reflecting correctly the intervention's long-term consequences.
Abstract: We test the empirical validity of a claim that has been playing a central role in debates on corporate governance — the claim that interventions by activist hedge funds have a detrimental effect on the long-term interests of companies and their shareholders. We subject this claim to a comprehensive empirical investigation, examining a long five-year window following activist interventions, and we find that the claim is not supported by the data.
We find no evidence that activist interventions, including the investment-limiting and adversarial interventions that are most resisted and criticized, are followed by short-term gains in performance that come at the expense of long-term performance. We also find no evidence that the initial positive stock-price spike accompanying activist interventions tends to be followed by negative abnormal returns in the long term; to the contrary, the evidence is consistent with the initial spike reflecting correctly the intervention’s long-term consequences. Similarly, we find no evidence for pump-and-dump patterns in which the exit of an activist is followed by abnormal long-term negative returns.
Our findings have significant implications for ongoing policy debates. Policymakers and institutional investors should not accept the validity of the assertions that activist interventions are costly to firms and their shareholders in the long term; such claims do not provide a valid basis for limiting the rights, powers, and involvement of shareholders.
TL;DR: In this paper, the variance risk premium, defined as the difference between the actual and risk-neutral expectations of the forward aggregate market variation, is used to predict future market returns.
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TL;DR: In this paper, 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 is developed.
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. In turn, these findings offer new evidence that some investment managers have skill and that attention is allocated rationally.