Financial and Banking Strategic Studies

Examining the impact of investor behavior on cryptocurrency returns: A Salience theory approach

Document Type : Original Article

Authors

Amir Mohammad Khalili
Omran Mohammadi

Department of Financial Engineering, Faculty of Industrial Engineering, Iran University of Science and Technology, Tehran, Iran.

https://doi.org/10.22105/fbs.2025.224405
Abstract
Purpose: This study examines the impact of salience theory on the cross-sectional return predictability of cryptocurrencies and evaluates it as a risk factor in asset pricing. The study seeks to analyze the role of investor behavioral biases in shaping return fluctuations in the cryptocurrency market.
Methodology: Using data from over 4,000 cryptocurrencies with a market capitalization above one million USD during the period from January 2014 to June 2025, a Salience theory was constructed based on the difference between salient weighted returns and average value-weighted returns. The empirical analysis was conducted through portfolio sorting, Fama-MacBeth regressions, and the Liu-Tsyvinski-Wu three-factor model.
Findings: The results show that cryptocurrencies with salient positive returns tend to underperform in subsequent periods, whereas those with salient negative returns tend to yield higher future returns. The effect of the ST index is statistically and economically significant and remains robust after controlling for other behavioral and fundamental factors. The index also explains well-known anomalies such as skewness preference, prospect theory, and downside beta.
Originality/Value: This study is the first to introduce the ST index as a novel and effective behavioral factor in the cryptocurrency market. The findings demonstrate its strong predictive power and its ability to explain cross-sectional pricing patterns, outperforming traditional models and other behavioral factors.

Keywords

Behavioral finance
Salience theory
Cryptocurrency
Psychological bias

Subjects

[1] Sockin, M., & Xiong, W. (2023). A model of cryptocurrencies. Management science, 69(11), 6684–6707. https://doi.org/10.1287/mnsc.2023.4756
[2] Cong, L. W., Li, Y., & Wang, N. (2021). Tokenomics: Dynamic adoption and valuation. The review of financial studies, 34(3), 1105–1155. https://doi.org/10.1093/rfs/hhaa089
[3] Bordalo, P., Gennaioli, N., & Shleifer, A. (2012). Salience theory of choice under risk. The quarterly journal of economics, 127(3), 1243–1285. https://doi.org/10.1093/qje/qjs018
[4] Cosemans, M., & Frehen, R. (2021). Salience theory and stock prices: Empirical evidence. Journal of financial economics, 140(2), 460–483. https://doi.org/10.1016/j.jfineco.2020.12.012
[5] Cakici, N., & Zaremba, A. (2022). Salience theory and the cross-section of stock returns: International and further evidence. Journal of financial economics, 146(2), 689–725. https://doi.org/10.1016/j.jfineco.2021.10.010
[6] Hirshleifer, D. (2001). Investor psychology and asset pricing. The journal of finance, 56(4), 1533–1597. https://doi.org/10.1111/0022-1082.00379
[7] Liu, Y., Tsyvinski, A., & Wu, X. (2022). Common risk factors in cryptocurrency. The journal of finance, 77(2), 1133–1177. https://doi.org/10.1111/jofi.13119
[8] Barberis, N., Mukherjee, A., & Wang, B. (2016). Prospect theory and stock returns: An empirical test. The review of financial studies, 29(11), 3068–3107. https://doi.org/10.1093/rfs/hhw049
[9] Harvey, C. R., & Siddique, A. (2000). Conditional skewness in asset pricing tests. The journal of finance, 55(3), 1263–1295. https://doi.org/10.1111/0022-1082.00247
[10]   Ang, A., Chen, J., & Xing, Y. (2006). Downside risk. The review of financial studies, 19(4), 1191–1239. https://doi.org/10.1093/rfs/hhj035
[11]   Kahneman, D., & Tversky, A. (2013). Prospect theory: An analysis of decision under risk. In Handbook of the fundamentals of financial decision making: part I (pp. 99–127). World Scientific. https://doi.org/10.1142/9789814417358_0006
Financial and Banking Strategic Studies
Volume 3, Issue 1
Spring 2025
Pages 69-78

Home

Indexing and Abstracting

Guide for Authors

Editorial Board

Submit Manuscript

Contact Us