Abstract
Hong, Lim and Stein (2000) show that momentum is mostly attributed to the persistence of the loser portfolio rather than of the winner portfolio. The notion that this bias is caused by the slower propagation of negative rather than positive news, caused by restrictions on the shorting of stocks, as proposed by Diamond and Verrecchia (1987), is empirically investigated in this study. The paper focuses on Sweden, where shorting stocks was prohibited during the 1980s. Is is found that the posited bias was much more pronounced when shorting was prohibited, and that momentum persisted longer. Moreover, using a Granger causality test it is found that the returns on a winner portfolio indeed leads the returns on a portfolio of losers, which is also consistent with the slower propagation of negative news.