Salience Theory and Cryptocurrency Returns
77 Pages Posted: 15 Dec 2021 Last revised: 30 Nov 2023
Date Written: November 3, 2023
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.
Video Abstract: https://youtu.be/F8BxhDWW7b4.
Keywords: Salience Theory, Asset Pricing, Behavioral Finance, Cryptocurrency, Portfolio Choice
JEL Classification: G10, G11, G13, G40, G41
Suggested Citation: Suggested Citation