Momentum, Reversal, and Uninformed Traders in Laboratory Markets

We report the results of three experiments based on the model of <link rid="b14">Hong and Stein (1999)</link>. 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.