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An empirical evaluation of the salience-based asset pricing model: Evidence from Australia

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  • Lee, Deok-Hyeon
  • Min, Byoung-Kyu
  • Xiao, Yucaho

Abstract

We empirically evaluate a salience-based asset pricing model in which the demand for stocks is affected by their most salient payoffs. We first reproduce the main results of Cosemans and Frehen (2021) for the U.S. market, that stocks with past upside (downside) salience returns earn lower (higher) subsequent returns, using portfolio sorts and firm-level cross-sectional regressions. We next examine the salience effect in the Australian market, where individual stock ownership is among the highest in the world. We also find that past salient returns have predictive power for the cross section of average returns in the Australian stock market, with this effect being particularly strong for equal-weighted portfolio returns.

Suggested Citation

  • Lee, Deok-Hyeon & Min, Byoung-Kyu & Xiao, Yucaho, 2024. "An empirical evaluation of the salience-based asset pricing model: Evidence from Australia," Pacific-Basin Finance Journal, Elsevier, vol. 84(C).
    • Handle: RePEc:eee:pacfin:v:84:y:2024:i:c:s0927538x24000039
    DOI: 10.1016/j.pacfin.2024.102252
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    Keywords

    Salience theory; Extrapolation; Anomaly; Return predictability;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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