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

Rongxin Chen, Gabriele M. Lepori, Chung-Ching Tai, Ming-Chien Sung

International Review of Financial Analysis, Volume: 84, Start page: 102419

Swansea University Author: Rongxin Chen

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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 asse...

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Published in: International Review of Financial Analysis
ISSN: 1057-5219 1873-8079
Published: Elsevier BV 2022
Online Access: Check full text

URI: https://cronfa.swan.ac.uk/Record/cronfa64716
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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 1738 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.
Keywords: Salience theory, Cryptocurrency, Cross-section of returns, Behavioural biases, Limits to arbitrage
College: Faculty of Humanities and Social Sciences
Start Page: 102419