Salience Theory and the Cross-Section of Stock Returns: International and Further Evidence

76 Pages Posted: 17 Dec 2020 Last revised: 19 Oct 2021

See all articles by Nusret Cakici

Nusret Cakici

Fordham university

Adam Zaremba

Montpellier Business School; Poznan University of Economics and Business; University of Cape Town

Date Written: December 17, 2020

Abstract

Motivated by existing evidence of the salience theory (ST) effect in the United States, we investigate its importance in 49 countries over the past three decades. Initial results suggest a negative relationship between the ST measure and future returns. The underperformance of low ST stocks is the strongest in countries with high idiosyncratic risk. However, the salience effect has three vital limitations. First, a substantial part of the anomaly can be attributed to the short-term return reversal. Second, it is priced primarily among microcaps. Third, the premium is realized predominantly following severe down markets and volatility spikes. Outside of microcaps and extreme market conditions, the salience effect does not exist.

Keywords: salience theory, probability weighting, microcaps, asset pricing, firm size, return predictability, equity anomalies, international markets, replication

JEL Classification: D03, G11, G12, G14

Suggested Citation

Cakici, Nusret and Zaremba, Adam, Salience Theory and the Cross-Section of Stock Returns: International and Further Evidence (December 17, 2020). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3750815 or http://dx.doi.org/10.2139/ssrn.3750815

Nusret Cakici

Fordham university ( email )

113 West 60th Street
New York, NY 10023
United States
2017473227 (Phone)
07446 (Fax)

Adam Zaremba (Contact Author)

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, Occitanie 34000
France

HOME PAGE: http://sites.google.com/view/adamzaremba

Poznan University of Economics and Business ( email )

al. Niepodległości 10
Poznań, 61-875
Poland

University of Cape Town

Cape Town
South Africa

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