Momentum, Reversal, and Uninformed Traders in Laboratory Markets
45 Pages Posted: 28 Sep 2004 Last revised: 4 Jan 2009
Date Written: June 1, 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.
Keywords: Market efficiency, behavioral finance, underreaction, overreaction, anomalies, uninformed traders
JEL Classification: C92, G14
Suggested Citation: Suggested Citation