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Momentum, Reversal, and Uninformed Traders in Laboratory Markets

Authors

  • ROBERT J. BLOOMFIELD,

  • WILLIAM B. TAYLER,

  • FLORA (HAILAN) ZHOU

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    • Cornell University, Emory University, and University of Illinois at Urbana-Champaign respectively. The authors thank Eric Fang and Tony Lednor for research support, and the Johnson Graduate School of Management at Cornell University, the Goizueta Business School at Emory University, and the College of Business at the University of Illinois at Urbana-Champaign for funding. We appreciate helpful comments from Elena Asparouhova; Jeffrey Hales; David Hirshleifer; Mark Nelson; participants in workshops at MIT, Stanford Graduate School of Business, Cornell University's Johnson Graduate School of Management, and Harvard Business School; and anonymous reviewers.


ABSTRACT

We report the results of three experiments based on the model of Hong and Stein (1999). Consistent with the model, the 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. The 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.

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