Momentum, Reversal, and Uninformed Traders in Laboratory Markets

45 Pages Posted: 28 Sep 2004 Last revised: 4 Jan 2009

See all articles by Robert J. Bloomfield

Robert J. Bloomfield

Cornell University - Samuel Curtis Johnson Graduate School of Management

William B. Tayler

Brigham Young University

Flora H. Zhou

Bentley University

Date Written: June 1, 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.

Keywords: Market efficiency, behavioral finance, underreaction, overreaction, anomalies, uninformed traders

JEL Classification: C92, G14

Suggested Citation

Bloomfield, Robert J. and Tayler, William B. and Zhou, Flora H., Momentum, Reversal, and Uninformed Traders in Laboratory Markets (June 1, 2008). Journal of Finance, October 2008, Available at SSRN: https://ssrn.com/abstract=596610 or http://dx.doi.org/10.2139/ssrn.596610

Robert J. Bloomfield (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

450 Sage Hall
Ithaca, NY 14853
United States
607-255-9407 (Phone)
607-254-4590 (Fax)

William B. Tayler

Brigham Young University ( email )

Brigham Young University
519 TNRB
Provo, UT 84602
United States
(801) 422-5972 (Phone)
(801) 422-0621 (Fax)

Flora H. Zhou

Bentley University ( email )

175 Forest Street
Waltham, MA 02145
United States

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