Salience Effect Based on Reference Dependence and Price Limit in Chinese Stock Market

This study proposes an improved salience theory measure ( STP RD ) that incorporates reference dependence and price-limit influence on investor attention, and finds a negative relationship between STP RD and future stock returns through an asset pricing model using a mean-variance framework. Accordingly, the empirical evidence from the Chinese stock market shows that STP RD has significant predictability of future stock returns. The long-short STP RD strategy yields 18.12% and 15.48% annual returns for equal- and value-weighted portfolios, respectively. Besides, the salience effect is stronger for higher arbitrage-limit stocks, and STP RD works better for predicting overnight than intraday stock returns. The empirical results are robust in various tests