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Momentum, Reversal, and Uninformed Traders in Laboratory Markets

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    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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    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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