Impact of Volatility Shocks on Attention Allocation Across Uncorrelated Assets [Link]
This paper explores the underlying reasons for the rapid spread of financial contagion across markets with weak correlations using a dynamic model of rational inattention. In my model, agents invest in two assets, whose returns are uncorrelated. Monitoring the returns on these assets entails costly information acquisition. Unlike in past work, I allow for the total amount of information that the investor acquires to endogenously respond to the change in volatility of assets' returns. By emphasizing the decomposition of attention rather than the relative signal weights of the two assets in the optimal signal, I find that increased volatility of one asset's returns heightens not only investor attention to that asset (as past research has found), but also to attention to other assets as well (counter to the conclusions of existing research), as a result of the increased subjective correlation. This subjective correlation arises because agents mix signals from both assets to reduce information costs, leading them to perceive a correlation between the assets even when none actually exists. I validate these predictions using the text from the Financial Times during the 1997 Asian Financial Crisis. Furthermore, the theoretical results provide general mechanisms of volatility spillover in the canonical rational inattention model and the pivotal role of information structure choice in these processes.
Working Papers
“Rational Inattention under Complexity: Experiment” with Jeong Yeol Kim
"Beauty Contest under Uncertain Media Credibility" with Yonggyun (YG) Kim
“Aid, Labor, Health, and Growth in Sub-Saharan Africa: Evidence from Quantile Estimation on Panel Data”
with Yeonbin Yang
“When Solar Fails Together: Snow, Correlated Outages and Winter Resource Adequacy in South Korea”
with Youngju Lee
Work in Progress
"AI and Economic Agent" with Jimin Kwon
"Financial Constraints and Matching in the Marriage Market" with Minseok Yang
“Location-Neutral Renewable Subsidies under Network Constraints: Evidence and Theory from Korea” with
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with Youngju Lee and Ilhyun Cho