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Momentum, Reversal, and Uninformed Traders in Laboratory Markets

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  • ROBERT J. BLOOMFIELD
  • WILLIAM B. TAYLER
  • FLORA (HAILAN) ZHOU
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    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. Copyright (c) 2009 the American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 64 (2009)
    Issue (Month): 6 (December)
    Pages: 2535-2558

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    Handle: RePEc:bla:jfinan:v:64:y:2009:i:6:p:2535-2558

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    Cited by:
    1. Dick, Christian D. & Menkhoff, Lukas, 2012. "Exchange rate expectations of chartists and fundamentalists," ZEW Discussion Papers 12-026, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    2. Lin, Shengle & Rassenti, Stephen, 2012. "Are under- and over-reaction the same matter? Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 39-61.
    3. Muehlfeld, Katrin & Weitzel, Utz & van Witteloostuijn, Arjen, 2013. "Fight or freeze? Individual differences in investors’ motivational systems and trading in experimental asset markets," Journal of Economic Psychology, Elsevier, Elsevier, vol. 34(C), pages 195-209.
    4. Lu, Tsung-Hsun, 2014. "The profitability of candlestick charting in the Taiwan stock market," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 26(C), pages 65-78.
    5. Chen, Yifan & Zhao, Huainan, 2012. "Informed trading, information uncertainty, and price momentum," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2095-2109.

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