Salience Theory and Cryptocurrency Returns

Abstract

We document that cross-sectional cryptocurrency returns predictably behaviour according to the salience theory of choice under risk. Investors overweight salience outcome (standout from the average of the alternatives). This leads to overpricing (underpricing) the cryptocurrencies with upward (downward) salience returns and generating negative (positive) expected returns in the subsequent period. The salience effect in the cryptocurrency market is over 20 times stronger than those observed in the equity markets. It is different from existing return anomalies documented in the cryptocurrency market and is a strong contender of risk factors that can explain other cross-sectional strategy returns in 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