A Rational Theory of Mutual Funds' Attention Allocation
Marcin Kacperczyk,Marcin Kacperczyk,Stijn Van Nieuwerburgh,Stijn Van Nieuwerburgh,Stijn Van Nieuwerburgh,Laura Veldkamp,Laura Veldkamp,Laura Veldkamp +7 more
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TLDR
In this article, 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. These findings offer new evidence that some investment managers have skill and that attention is allocated rationally.read more
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References
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Book
Elements of information theory
Thomas M. Cover,Joy A. Thomas +1 more
TL;DR: The author examines the role of entropy, inequality, and randomness in the design of codes and the construction of codes in the rapidly changing environment.
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Business conditions and expected returns on stocks and bonds
Eugene F. Fama,Kenneth R. French +1 more
TL;DR: For example, this paper found that expected returns on common stocks and long-term bonds contain a term or maturity premium that has a clear business-cycle pattern (low near peaks, high near troughs).
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On the impossibility of informationally efficient markets
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By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior
TL;DR: This paper presented a consumption-based model that explains a wide variety of dynamic asset pricing phenomena, including the procyclical variation of stock prices, the long-horizon predictability of excess stock returns, and the countercyclical variations of stock market volatility.
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Investor sentiment and the cross-section of stock returns
Malcolm Baker,Jeffrey Wurgler +1 more
TL;DR: The authors study how investor sentiment affects the cross-section of stock returns and find that when sentiment is low, subsequent returns are relatively high for small stocks, young stocks, high volatility stocks, unprofitable stocks, non-dividend-paying stocks, extreme growth stocks, and distressed stocks.