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American Economic Review: Vol. 103 No. 3 (May 2013)

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Salience and Asset Prices

Article Citation

Bordalo, Pedro, Nicola Gennaioli, and Andrei Shleifer. 2013. "Salience and Asset Prices." American Economic Review, 103(3): 623-28.

DOI: 10.1257/aer.103.3.623

Abstract

We present a simple model of asset pricing in which payoff salience drives investors' demand for risky assets. The key implication is that extreme payoffs receive disproportionate weight in the market valuation of assets. The model accounts for several puzzles in finance in an intuitive way, including preference for assets with a chance of very high payoffs, an aggregate equity premium, and countercyclical variation in stock market returns.

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Authors

Bordalo, Pedro (Royal Holloway, U London)
Gennaioli, Nicola (U Bocconi)
Shleifer, Andrei (Harvard U)

JEL Classifications

D14: Personal Finance
G11: Portfolio Choice; Investment Decisions
G12: Asset Pricing; Trading volume; Bond Interest Rates


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