Salience Theory And Stock Return

Traditional finance is difficult to effectively explain the real world,and behavioral finance aims to reconcile the interpretations based on human behavior—including individual behavior and group behavior—contradictory with traditional finance and reality.Behavioral finance is framed with two cornerstones,limited arbitrage and psychology.The limited arbitrage hypothesis believes that there are various restrictions on the so-called arbitrage opportunities,which hinder the return of prices to values;the psychological setting uses psychological research to analyze people’s various systematic cognitive biases,which affect people’s Beliefs and preferences when making risky decisions.my country’s financial market is relatively immature,investor education is not as good as mature markets,and irrational behaviors are widespread.However,the assumptions of behavioral finance are closer to the real market.Research on behavioral finance will help to understand the market more deeply.The ability and attention of decision makers to process information are limited,so due to these cognitive barriers,more attention-grabbing information will be overly focused by decision makers,and salience theory is a concrete model that reflects this phenomenon.This paper sorts out and summarizes the existing research on salience theoretical models.Salient theory has two key points:(1)Human attention is limited,and the attention of decision makers will be attracted by the most significant reward;(2)Decision makers make decisions by comparing the different choices they can make.decision making.In the model of salience theory,the environment in which choices are made will affect decision makers’ subjective perception of choices through the mechanism of salience rewards.The salience effect function visualizes the characteristics of human perception of the external environment,and captures people’s induction and response to the salience effect.The salience effect function σ expresses the degree of response to external information in a specific situation.The parameter δof the salience decision-maker expresses the degree of attention to the salience state,which reflects the individual’s ability to process various information and cognitive load.This paper further examines and analyzes the source of the excess return created by the prominent effect factor STV:(1)This paper adds the factor loading of the prominent effect factor STV to the explanatory variable and performs Fama-Mac Beth regression on the future returns of the stock,and finds that the excess of the prominent effect factor STV Returns do not obey risk compensation explanations,but are more likely to come from mispricing;(2)This paper conducts hierarchical tests based on the degree of institutional holdings and market trading sentiment,and finds that in stocks with lower proportions of institutional holdings and higher market sentiment,the role of the highlight effect factor STV is more obvious,and it is determined that mispricing is the reason why the highlight effect factor STV can obtain excess returns;(3)This paper further analyzes the characteristics of investor behavior,by Fama-Mac Beth regression test and the long-term cumulative rate of return adjusted by the factor model are used for analysis and testing.It is the underreaction that highlights the ability of the factor STV to obtain excess returns;(4)This paper makes a more detailed analysis of the underreaction In-depth analysis shows that the arbitrage restriction cannot explain the excess return of the prominent effect factor STV,and the underreaction of investors caused by the gaming preference is one of the reasons for the excess return of the prominent effect factor STV.