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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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first_indexed 2023-10-18T20:00:32Z
last_indexed 2023-10-18T20:00:32Z
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spelling v2 64716 2023-10-11 Can salience theory explain investor behaviour? Real-world evidence from the cryptocurrency market 594e1b777174ec7a0ddafd29e99f1f4c Rongxin Chen Rongxin Chen true false 2023-10-11 BAF 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. Journal Article International Review of Financial Analysis 84 102419 Elsevier BV 1057-5219 1873-8079 Salience theory, Cryptocurrency, Cross-section of returns, Behavioural biases, Limits to arbitrage 30 11 2022 2022-11-30 10.1016/j.irfa.2022.102419 http://dx.doi.org/10.1016/j.irfa.2022.102419 COLLEGE NANME Accounting and Finance COLLEGE CODE BAF Swansea University 2023-11-27T16:06:13.7065290 2023-10-11T14:42:42.5491818 Faculty of Humanities and Social Sciences School of Management - Accounting and Finance Rongxin Chen 1 Gabriele M. Lepori 2 Chung-Ching Tai 3 Ming-Chien Sung 4 64716__29122__ff058ea9303e484eb47abc8e6521a38f.pdf 64716.VOR.pdf 2023-11-27T16:04:18.9909519 Output 1299886 application/pdf Version of Record true © 2022 The Authors. Published by Elsevier Inc. Distributed under the terms of a Creative Commons Attribution 4.0 International License (CC BY 4.0). true eng https://creativecommons.org/licenses/by/4.0/
title Can salience theory explain investor behaviour? Real-world evidence from the cryptocurrency market
spellingShingle Can salience theory explain investor behaviour? Real-world evidence from the cryptocurrency market
Rongxin Chen
title_short Can salience theory explain investor behaviour? Real-world evidence from the cryptocurrency market
title_full Can salience theory explain investor behaviour? Real-world evidence from the cryptocurrency market
title_fullStr Can salience theory explain investor behaviour? Real-world evidence from the cryptocurrency market
title_full_unstemmed Can salience theory explain investor behaviour? Real-world evidence from the cryptocurrency market
title_sort Can salience theory explain investor behaviour? Real-world evidence from the cryptocurrency market
author_id_str_mv 594e1b777174ec7a0ddafd29e99f1f4c
author_id_fullname_str_mv 594e1b777174ec7a0ddafd29e99f1f4c_***_Rongxin Chen
author Rongxin Chen
author2 Rongxin Chen
Gabriele M. Lepori
Chung-Ching Tai
Ming-Chien Sung
format Journal article
container_title International Review of Financial Analysis
container_volume 84
container_start_page 102419
publishDate 2022
institution Swansea University
issn 1057-5219
1873-8079
doi_str_mv 10.1016/j.irfa.2022.102419
publisher Elsevier BV
college_str Faculty of Humanities and Social Sciences
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hierarchy_top_id facultyofhumanitiesandsocialsciences
hierarchy_top_title Faculty of Humanities and Social Sciences
hierarchy_parent_id facultyofhumanitiesandsocialsciences
hierarchy_parent_title Faculty of Humanities and Social Sciences
department_str School of Management - Accounting and Finance{{{_:::_}}}Faculty of Humanities and Social Sciences{{{_:::_}}}School of Management - Accounting and Finance
url http://dx.doi.org/10.1016/j.irfa.2022.102419
document_store_str 1
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description 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.
published_date 2022-11-30T16:06:14Z
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