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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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    References listed on IDEAS

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    3. Cakici, Nusret & Shahzad, Syed Jawad Hussain & Będowska-Sójka, Barbara & Zaremba, Adam, 2024. "Machine learning and the cross-section of cryptocurrency returns," International Review of Financial Analysis, Elsevier, vol. 94(C).
    4. Goh, Jihoon & Byun, Suk-Joon & Kim, Donghoon, 2026. "Salience theory and stock returns: The role of reference-dependent preferences," Research in International Business and Finance, Elsevier, vol. 81(C).
    5. Shahriari, Hesam & Stivers, Adam & Tsang, Ming, 2025. "Bias in cryptocurrency investing: The effect of financial and moral considerations," Journal of Behavioral and Experimental Finance, Elsevier, vol. 47(C).
    6. Lu, Ruochen & Chen, Yang & Ye, Qing & Wu, Yuliang, 2026. "Investor attention and the salience effect in the Chinese stock market: Insights from the COVID-19 pandemic," International Review of Economics & Finance, Elsevier, vol. 105(C).
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    8. Mercik, Aleksander & Będowska-Sójka, Barbara & Karim, Sitara & Zaremba, Adam, 2025. "Cross-sectional interactions in cryptocurrency returns," International Review of Financial Analysis, Elsevier, vol. 97(C).
    9. Weihao Han & David Newton & Emmanouil Platanakis & Haoran Wu & Libo Xiao, 2024. "The diversification benefits of cryptocurrency factor portfolios: Are they there?," Review of Quantitative Finance and Accounting, Springer, vol. 63(2), pages 469-518, August.
    10. Li, Xingyi & Liu, Zhuang & Liu, Yujun & Zhu, Shushang & Yan, Jingzhou, 2026. "Predicting cryptocurrency returns with machine learning: Evidence from high-dimensional factor modeling," Pacific-Basin Finance Journal, Elsevier, vol. 96(C).
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    13. Jia, Yuecheng & Simkins, Betty & Yan, Shu & Zhang, Hongyu & Zhao, Jiangyu, 2026. "Psychological anchoring effect and cross section of cryptocurrency returns," Journal of Banking & Finance, Elsevier, vol. 182(C).

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    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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