Salience Theory and Cryptocurrency Returns

70 Pages Posted: 15 Dec 2021 Last revised: 19 Jan 2022

See all articles by Charlie X. Cai

Charlie X. Cai

University of Liverpool Management School

Ran Zhao

Claremont Graduate University, Drucker School of Management

Date Written: January 3, 2022

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

Suggested Citation

Cai, Charlie Xiaowu and Zhao, Ran, Salience Theory and Cryptocurrency Returns (January 3, 2022). Available at SSRN: https://ssrn.com/abstract=3983602 or http://dx.doi.org/10.2139/ssrn.3983602

Charlie Xiaowu Cai

University of Liverpool Management School ( email )

University of Liverpool
Liverpool, L69 7ZA
United Kingdom

Ran Zhao (Contact Author)

Claremont Graduate University, Drucker School of Management ( email )

150 E. Tenth Street
Claremont, CA 91711
United States

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