Jeong Ho (John) Kim
Assistant Professor of Economics, Emory University
Visiting Scholar, Federal Reserve Bank of Atlanta
Asset Management, Financial Economics, Information Economics, Macroeconomics
1. "Discrete Actions in Information-Constrained Decision Problems", with Junehyuk Jung, Filip Matejka, and Christopher A. Sims.
Accepted, Review of Economic Studies.
Individuals are constantly processing external information and translating it into actions. This draws on limited resources of attention and requires economizing on attention devoted to signals related to economic behavior. A natural measure of such costs is based on Shannon’s “channel capacity”. Modeling economic agents as constrained by Shannon capacity as they process freely avail- able information turns out to imply that discretely distributed actions, and thus actions that persist across repetitions of the same decision problem, are very likely to emerge in settings that without information costs would imply continuously distributed behavior. We show how these results apply to the behavior of an investor choosing portfolio allocations, as well as to some mathematically simpler “tracking” problems that illustrate the mechanism. Trying to use costs of adjustment to explain “stickiness” of actions when interpreting the behavior in our economic examples would lead to mistaken conclusions.
Active asset management has grown in terms of both industry size and the number of funds, despite the industry's poor track record. We find that this growth is quantitatively consistent with a model in which investors rationally learn about skills across funds and about the nature of returns to scale, optimally allocating to active management. Despite the negative return history, the sustained entry of new funds can translate into industry growth, when investors overestimate both the average fund's skill and the effects of decreasing returns to scale. The industry can grow too big because learning about fund skill is slow.
3. "The Beta Anomaly and Mutual Fund Performance", with Paul Irvine and Jue Ren.
We contend that mutual fund performance cannot be properly measured using the alpha from standard asset pricing models if passive portfolios have nonzero alphas. We show how controlling for the passive component of alpha produces an alternative measure of managerial skill that we call ``active alpha.'' Active alpha is persistent and associated with superior portfolio performance. Therefore, it would be sensible for sophisticated investors to reward managers with high active alpha. In addition to allocating their money based on standard alpha, we find that a subset of investors allocate their assets to funds with high active alpha performance.
4. "A Welfare Criterion with Endogenous Welfare Weights for Belief Disagreement Models", with Byung-Cheol Kim.
While belief disagreement models have played an important role in explaining conspicuous financial phenomena such as speculative bubbles, measuring social welfare in those models has been a challenge. Indeed, the social planner may not know the objective probabilities or whose subjective beliefs to elect under belief disagreements. We propose a welfare criterion that endogenously determines sensible welfare weights based on competitive equilibrium allocation as a benchmark. We apply our method to several models with heterogeneous beliefs. We show how a moderate regulation, rather than a tight control, of the market can be often better even when there are heterogeneous beliefs.
In the context of a ``beauty-contest'' coordination game, players choose how much costly attention to pay to public information. Introducing information costs based on rational inattention implies that, in the neighborhood of zero information costs, multiple equilibria can emerge in settings that without information costs would imply unique linear equilibrium. Agents have a coordination motive arising from strategic complementarity in their actions, which, in turn, implies coordinating on attention devoted to the public signal. This effect induces multiple equilibrium levels of attention at intermediate levels of transparency of public information (worth paying attention to if others do, but not worth paying attention to if others do not) for small enough information costs. Formally, the set of equilibria under rational inattention does not converge to the set of equilibria without information costs as the price of attention approaches zero. Quintessentially, small deviations from rationality can make significant differences to economic equilibria.
Work in Progress
1. "Portfolio Similarity in Mutual Fund Families", with Ji-Woong Chung and Jaeouk Kim.
2. "Does Fund Size Erode Mutual Fund Performance? A Panel VAR Approach", with Tong Xu and Tao Zha.