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

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.