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Time-varying fund manager skill

Author

Listed:
  • Laura Veldkamp

    (NYU Stern)

Abstract

The literature assessing whether mutual fund managers have skill typically regards skill as an immutable attribute of the manager or the fund. We show that many measures of skill, such as returns, alphas, and measures of stock-picking and market-timing, appear to vary over the business cycle. We argue that skill is a general cognitive ability that is applied to different tasks, such as picking stocks or market timing. Using tools from the rational inattention literature, the theory shows that the relative value of these tasks varies cyclically. It 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.

Suggested Citation

  • Laura Veldkamp, 2012. "Time-varying fund manager skill," 2012 Meeting Papers 68, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:68
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G2 - Financial Economics - - Financial Institutions and Services

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