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Can salience theory explain investor behaviour? Real-world evidence from the cryptocurrency market

Can salience theory explain investor behaviour? Real-world evidence from the cryptocurrency market
Can salience theory explain investor behaviour? Real-world evidence from the cryptocurrency market
Research on human attention indicates that objects that stand out from their surroundings, i.e., salient objects, attract the attention of our sensory channels and receive undue weighting in the decision-making process. In the financial realm, salience theory predicts that individuals will find assets with salient upsides (downsides) appealing (unappealing). We investigate whether this theory can explain investor behaviour in the cryptocurrency market. Consistent with the theory’s predictions, using a sample of 1,738 cryptocurrencies, we find that cryptocurrencies that are more (less) attractive to “salient thinkers” earn lower (higher) future returns, which indicates that they tend to be overpriced (underpriced). On average, a one cross-sectional standard-deviation increase in the salience theory value of a cryptocurrency reduces its next-week return by 0.41%. However, the salience effect is confined to the micro-cap segment of the market, and its size is moderated by limits to arbitrage.
Behavioural biases, Cross-section of returns, Cryptocurrency, Limits to arbitrage, Salience theory
1057-5219
Chen, Rongxin
abbbb245-661f-413e-8b2e-69bdb4eaae8b
Lepori, Gabriele
551865b7-2e3a-4de1-aaf9-6c7f23e32e8d
Tai, Chung-Ching
b3370b23-7410-4254-99bc-6711046e1095
Sung, Ming-Chien
2114f823-bc7f-4306-a775-67aee413aa03
Chen, Rongxin
abbbb245-661f-413e-8b2e-69bdb4eaae8b
Lepori, Gabriele
551865b7-2e3a-4de1-aaf9-6c7f23e32e8d
Tai, Chung-Ching
b3370b23-7410-4254-99bc-6711046e1095
Sung, Ming-Chien
2114f823-bc7f-4306-a775-67aee413aa03

Chen, Rongxin, Lepori, Gabriele, Tai, Chung-Ching and Sung, Ming-Chien (2022) Can salience theory explain investor behaviour? Real-world evidence from the cryptocurrency market. International Review of Financial Analysis, 84, [102419]. (doi:10.1016/j.irfa.2022.102419).

Record type: Article

Abstract

Research on human attention indicates that objects that stand out from their surroundings, i.e., salient objects, attract the attention of our sensory channels and receive undue weighting in the decision-making process. In the financial realm, salience theory predicts that individuals will find assets with salient upsides (downsides) appealing (unappealing). We investigate whether this theory can explain investor behaviour in the cryptocurrency market. Consistent with the theory’s predictions, using a sample of 1,738 cryptocurrencies, we find that cryptocurrencies that are more (less) attractive to “salient thinkers” earn lower (higher) future returns, which indicates that they tend to be overpriced (underpriced). On average, a one cross-sectional standard-deviation increase in the salience theory value of a cryptocurrency reduces its next-week return by 0.41%. However, the salience effect is confined to the micro-cap segment of the market, and its size is moderated by limits to arbitrage.

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More information

Accepted/In Press date: 16 October 2022
e-pub ahead of print date: 19 October 2022
Published date: 26 October 2022
Additional Information: Publisher Copyright: © 2022 The Authors
Keywords: Behavioural biases, Cross-section of returns, Cryptocurrency, Limits to arbitrage, Salience theory

Identifiers

Local EPrints ID: 471607
URI: http://eprints.soton.ac.uk/id/eprint/471607
ISSN: 1057-5219
PURE UUID: 90890f0e-9af5-4ead-ade7-88f344182e0c
ORCID for Rongxin Chen: ORCID iD orcid.org/0000-0003-2210-8824
ORCID for Gabriele Lepori: ORCID iD orcid.org/0000-0002-2619-227X
ORCID for Chung-Ching Tai: ORCID iD orcid.org/0000-0002-2557-177X
ORCID for Ming-Chien Sung: ORCID iD orcid.org/0000-0002-2278-6185

Catalogue record

Date deposited: 14 Nov 2022 18:10
Last modified: 16 Nov 2022 02:54

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Contributors

Author: Rongxin Chen ORCID iD
Author: Gabriele Lepori ORCID iD
Author: Chung-Ching Tai ORCID iD
Author: Ming-Chien Sung ORCID iD

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