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Momentum, Reversal, and Uninformed Traders in Laboratory MarketsRobert J. BloomfieldCornell University - Samuel Curtis Johnson Graduate School of Management William B. TaylerBrigham Young University Flora H. ZhouUniversity of Illinois at Urbana-Champaign June 1, 2008 Journal of Finance, October 2008 Abstract: We report the results of three experiments based on the model of Hong and Stein (1999). Consistent with the model, results show that when informed traders do not observe prices, uninformed traders generate long-term price reversals by engaging in momentum trade. However, when informed traders also observe prices, uninformed traders generate reversals by engaging in contrarian trading. Results suggest that a dominated information set is sufficient to account for the contrarian behavior observed among individual investors, and that uninformed traders may be responsible for long-term price reversals but play little role in driving short-term momentum.
Number of Pages in PDF File: 45 Keywords: Market efficiency, behavioral finance, underreaction, overreaction, anomalies, uninformed traders JEL Classification: C92, G14 working papers seriesDate posted: September 28, 2004 ; Last revised: January 4, 2009Suggested CitationContact Information
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