Salience theory and cryptocurrency returns

Charlie X. Cai and Ran Zhao

Journal of Banking & Finance, 2024, vol. 159, issue C

Abstract: The salience theory of choice under risk shows that investor behavior drives cross-sectional cryptocurrency returns. Investors place too much weight on salient payouts, causing overvaluation of cryptocurrencies with upward salience returns and undervaluation of those with downward salience returns, leading to negative expected returns for the former and positive expected returns for the latter. The salience effect in the cryptocurrency market is more pronounced than in equity markets, making it a significant risk factor for explaining other cross-sectional returns in the cryptocurrency market. Unlike other documented return predictors, the salience theory uniquely contributes to understanding the cryptocurrency market.

Keywords: Salience theory; Asset pricing; Behavioral finance; Cryptocurrency; Portfolio choice (search for similar items in EconPapers)
JEL-codes: G10 G11 G13 G40 G41 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:159:y:2024:i:c:s0378426623002388

DOI: 10.1016/j.jbankfin.2023.107052

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