Momentum, Reversal, and Uninformed Traders in Laboratory Markets
Robert J. Bloomfield
Cornell University - Samuel Curtis Johnson Graduate School of Management
William B. Tayler
Brigham Young University
Flora H. Zhou
Georgia State University
June 1, 2008
Journal of Finance, October 2008
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
Date posted: September 28, 2004 ; Last revised: January 4, 2009
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