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Salience theory and cryptocurrency returns

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  • Cai, Charlie X.
  • Zhao, Ran

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.

Suggested Citation

  • Cai, Charlie X. & Zhao, Ran, 2024. "Salience theory and cryptocurrency returns," Journal of Banking & Finance, Elsevier, vol. 159(C).
    • Handle: RePEc:eee:jbfina:v:159:y:2024:i:c:s0378426623002388
    DOI: 10.1016/j.jbankfin.2023.107052
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    More about this item

    Keywords

    Salience theory; Asset pricing; Behavioral finance; Cryptocurrency; Portfolio choice;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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