Salient Theory Predicts US Stocks in the Cross Section
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Salience Theory and Risk Anomalies
Jiaqi Guo; Youwei Li
- University of Birmingham
- University of Hull
- ?Hull University Business School
Strategy in a nutshell
Trade U.S. stocks (NYSE/AMEX/NASDAQ) using beta and salience theory (ST). Double-sort stocks monthly into quintiles by beta and ST. Go long the low-ST portfolio and short the high-ST portfolio. Portfolios are value-weighted and held for one month.
Economic rationale
Investor attention to salient payoffs drives risk-return patterns. Salience amplifies over- and underpricing, especially during high volatility, with retail attention higher for stocks with pronounced upside or downside salience.
Backtest performance
Annualised return8.18%
Volatility25.57%
Sharpe ratio0.32