Momentum, Reversal, and Uninformed Traders in Laboratory Markets

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.

Exchange rate expectations of chartists and fundamentalists

“…Some models rely on segmented investors, such as sophisticated α-investors and purely trend-following β-investors introduced by Day and Huang (1990), such as Chiarella, Dieci, and Gardini (2002), or segmented markets, such as in Wester-hoff (2004). The results of these simulation studies are largely consistent with highly stylized facts of financial markets and observations in experimental asset markets, where, usually, students form expectations about future asset prices and operate in a dynamic market setting (see, e.g., Sonnemans, Hommes, Tuinstra, and Van De Velden, 2004;Haruvy, Lahav, and Noussair, 2007;Bloomfield, Tayler, and Zhou, 2009;Hommes, 2011). Results are also consistent with models from behavioral finance, such as Barberis, Shleifer, and Vishny (1998), where investors believe in two states of the world, i.e.…”

Study of market model describing the contrary behaviors of informed and uninformed agents: Being minority and being majority

“…[10][11][12]. Various types of agents are also modeled, such as fundamentalists, chartists and noisy traders, momentum traders and reverse momentum traders [13][14][15]. While the models become more realistic, they usually end up being too complex for thorough understanding and analytical treatment.…”

“…Similarly, in financial markets, groups and individuals may have contrary aims. For example, in European and America stock markets, the investors are classified into informed investors and uninformed investors [15]. The informed investors exploit the insider information to make profits, they buy or sell, and wish other investors to choose the opposite action (i.e.…”

Expected Mispricing: The Joint Influence of Accounting Transparency and Investor Base

“…7 Alternatively, relatively unsophisticated investors who nevertheless review the financial statements may indeed have a higher level of sophistication (and, therefore, a possible comparative advantage) over others who do not review the financial statements. 8 With the assumption that they can sell the stock at a higher price just prior to the earnings management being revealed to the masses, these investors may attempt to game the market by, for example, aggressively buying the stock, thereby driving prices higher than warranted by fundamental news (Scheinkman and Xiong [2003]; see also Andreassen and Kraus [1990], Bloomfield, Tayler, and Zhou [2009], cf., Badrinath and Wahal [2002]). This potential for multiple differing strategies is consistent with recent evidence from abstract experimental markets, in which more understandable information leads to higher rates of information processing by market participants, but the increased processing, in turn, leads participants to apply various strategies-including not only trading on fundamental value, but also general momentum trading as well as "riding the bubble" (Hobson [2009]).…”