Jeong Ho (John) Kim

Asset Pricing/Investments, Mutual Funds, Behavioral Economics, Machine Learning

1. Unemployment Duration under Flexible Information Acquisition, with Kyungmin (Teddy) Kim and Marilyn Pease.

International Economic Review, 2024.

We consider a worker's job search problem in which firms arrive sequentially, observe the worker's unemployment duration, and conduct an interview to learn about her unobservable productivity. Firms engage in fully flexible information acquisition subject to a uniformly posterior-separable cost function. We provide a closed-form characterization of equilibrium job search dynamics and demonstrate that endogenous information amplifies the "stigma" effect of long unemployment duration relative to exogenous information. We also show that lowering firms' information-acquisition costs has ambiguous implications for a worker's unemployment duration.

2. The Beta Anomaly and Mutual Fund Performance, with Paul Irvine, and Jue Ren.

Management Science, 2024.

We find evidence for the beta anomaly in mutual fund performance. This anomaly is not accounted for in the standard four-factor framework, nor by the addition of a betting-against-beta factor to the benchmark model. We identify the active component of alpha (active alpha) not attributable to the passive effects related to beta. Active alpha is persistent and associated with superior portfolio performance. We find that, while many investors use standard alpha to allocate capital, a subset of sophisticated investors allocate their money based on active alpha. Our procedure is useful across the commonly used benchmark models for measuring performance, and can be extended to accommodate other potential factor beta anomalies.

3. A Welfare Criterion with Endogenous Welfare Weights for Belief Disagreement Models, with BC Kim.

Journal of Economic Behavior & Organization, 2021.

Belief disagreement generates a fundamental tension between two desirable features of a resource allocation: Pareto optimality and risk sharing. While Pareto optimality generally opposes restrictions to trade, a growing literature rejects it in the presence of heterogeneous beliefs and proposes welfare criteria that instead assume risk sharing as fundamentally desirable. We propose a welfare criterion that balances out these two desirable features by endogenously determining admissible welfare weights based on competitive equilibrium allocation as a benchmark. Applying our method to several belief disagreement models, we show how the welfare-optimal degree of risk sharing is between those suggested by Pareto optimality (which implies less) and by other existing approaches (which imply more).

4. Discrete Actions in Information-Constrained Decision Problems, with Junehyuk Jung, Filip Matejka, and Christopher A. Sims.

Review of Economic Studies, 2019.

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 available 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.

1. Investor Learning and the Aggregate Allocation of Capital to Active Management (An earlier draft was circulated as "Why Has Active Asset Management Grown?")

We estimate a model in which Bayesian investors learn about parameters governing mutual fund performance in real time and competitively allocate capital to funds, conditional on their current beliefs. The model-implied aggregate allocation of capital in response to the history of observed returns closely approximates the observed allocation over time. Key to this result is that investors learn not only about differential ability across funds but also about the nature of returns to scale---how a fund's performance depends on its size versus the size of its competition. Overall, our results support that mutual fund investors are not naive.

2. Optimal Communication in Banking Supervision, with Teddy Kim, Vicky Liu and Noam Tanner.

Submitted.

We present a model of banking supervision in which the supervisor first communicates her information to a privately informed bank and later decides whether to approve or disapprove the bank's investments. The supervisor's optimal communication strategy features "muddling" to introduce uncertainty into the bank's problem, thereby inducing the bank to act on its own signal. We demonstrate that the quality of supervision can deteriorate as the bank becomes more informed; in particular, the supervisor cannot utilize the bank's information when it is almost perfect. We propose a few ways to mitigate this problem within our framework.

3. Capital Allocation and the Market for Mutual Funds: Inspecting the Mechanism, with Jules H. van Binsbergen, and Soohun Kim.

Revise and Resubmit.

We exploit heterogeneity in decreasing returns to scale parameters across mutual funds to analyze the importance of scalability for investors' capital allocation decisions. We find strong evidence that steeper decreasing returns to scale attenuate flow sensitivity to performance. We calibrate a rational model of active fund management and show that a large fraction of cross-sectional variation in assets-under-management is due to investors anticipating the effects of scale on return performance. We conclude that decreasing returns to scale play a key role in achieving equilibrium in the intermediated investment management market.

4. Risk, Return, and Environmental and Social Ratings, with Sudheer Chava and Jaemin Lee.

Revise and Resubmit.

We analyze the risk and return characteristics across firms sorted by their environmental and social (ES) ratings. We document that ES ratings have no significant relationship with average stock returns or unconditional market risk. Stocks of firms with higher ES ratings do have significantly lower systematic downside risk, as measured by downside beta, relative downside beta, coskewness, and tail risk beta. However, the economic magnitude of such reduction in downside risk is modest. Our results suggest that investors who derive non-pecuniary benefits from ES investing need not sacrifice financial performance.

5. The Price of Losing Trust: An Empirical Study of Social Misconduct by YouTube Creators, with Rajiv Garg and Sung Kwan Lee.

Submitted.

We examine the consequences of reported social misconduct by YouTube creators. Prior literature suggests that such creators may benefit from negative marketing: exposure of their social misconduct can induce negative word-of-mouth, which in turn increases the virality of their content. However, we show that, overall, the opposite effect prevails. Utilizing a staggered difference-in-differences approach, we find that YouTube channels associated with creators exposed of social misconduct experience significant drops in subscribers and viewership, which translate to economically significant losses ranging from $4,768 to $8,292 per month per channel. These effects are similar for channels featuring products and those that do not, with a more pronounced impact on channels where creators can be visually identified. We also find that these consequences, driven by a loss of customer trust, can be partially mitigated through credible online apologies.

6. Beauty Contest with Rationally Inattentive Agents.

Revise and Resubmit.

In the context of a "beauty-contest" coordination game, agents 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 for small enough information costs.

1. Do Credit Supply Shocks Affect Fertility Choices? with Heebum Lee and Sung Kwan Lee.

Journal of Behavioral and Experimental Finance, 2022.

We empirically investigate the role of credit supply in fertility decisions. Using the U.S. banking deregulation in the 1980s and the 2007–2009 Great Recession as two different laboratories for credit supply shocks, we find that an increase in credit supply consistently implies higher fertility rates, as well as higher propensity to have a child. This relation, which is economically and statistically significant, differs across individuals: It is more pronounced for young women and for families with unemployed husbands. Finally, we provide suggestive evidence that increased credit access leads to more optimistic expectations about personal prospects, and in turn, higher fertility rates.

1. Movies, with Sung Kwan Lee.

2. Learning, with Yonggyun (YG) Kim.