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

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) s...

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Bibliographic Details
Published in:Pacific-Basin finance journal 2024-04, Vol.84, p.102252, Article 102252
Main Authors: Lee, Deok-Hyeon, Min, Byoung-Kyu, Xiao, Yucaho
Format: Article
Language:English
Subjects:
Anomaly
Extrapolation
Return predictability
Salience theory
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Summary: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. •An out-of-sample evaluation of the salience theory is conducted using the Australian market.•Australia's high individual stock ownership offer a compelling setting.•Stocks with salient upsides earn lower subsequent returns.
ISSN:0927-538X
1879-0585
DOI:10.1016/j.pacfin.2024.102252