Tomorrow, the biggest sports event on earth gets underway. The soccer World Cup will take over daily life in many countries of the world. Unfortunately, this will not be the case in my home country. After losing the final in 2010 and coming in third in 2014, The Netherlands will not be present in Russia. Apart from supporting Belgium, I will try to answer a financial-market related question to keep myself ‘involved’; ‘Does the World Cup affect stock markets?’
Defeat means loss
A ground-breaking study on the relationship between the World Cup and stock market returns is that of Edmans, Garcia and Norli (2007). Their, pretty straightforward, hypothesis is that, if there is something like a ‘World Cup effect’, the best way to look for it is on the stock markets of the countries that are competing. Their analysis comprises the final scores of roughly 1100 games, including 39 different countries. The results reveal that, the day after a country loses, the stock market of that country realizes a negative abnormal return (the local market return adjusted for the global market return) that is statistically significant. Hence, disappointment on the soccer pitch leads to a bearish sentiment on the local market the day after.
So why are Edmans, Garcia and Norli (2007) convinced it is indeed the result of the game that is reflected in the negative return the day after? First, because the magnitude of the (negative) return surges as the importance of the game increases. A defeat in the knock out phase of the World Cup results in a negative return that is four times bigger than the return that follows after a loss during the qualifiers. Second, no abnormal return was observed the day after a country wins the game. This complies with the generally accepted notion that the effect of a loss, be it on the stock market or on the pitch, is much more pronounced than that of a win. Third, the World Cup’s set up is asymmetric by nature. A defeat leads to immediate elimination in most cases, while a win ‘only’ helps you advance to the next round. Except for the final, of course.
Soccer mood swings
The Dutch central bank also employs some soccer fanatics. In a more recent study, Ehrmann & Jansen (2014) try to get a grip on stock market developments related to the World Cup that become visible while the games are being played. Their main results are pretty interesting. Already during World Cup matches does the stock market of a single country reflect circumstances in which countries are very unlikely to win or advance. Minutes before stopping time, when the outcome becomes increasingly predictable, the souring mood of supporters becomes visible in the local stock market.
To build their case, Ehrmann & Jansen use minute-by-minute data on the share price of STMicroelectronics during two deciding, group stage matches of France and Italy at the World Cup 2010 in South Africa. STMicroelectronics is traded both on the stock exchange of Milan and Paris. Normally, the difference between the quotes on both exchanges is negligible. This makes it a perfect instrument to find out what happens when a team is about to lose at the World Cup.
France lost its final group match in 2010 to South Africa, final score 2-1, and were thrown out of the tournament. Both times at which South Africa managed to score, the price of STMicroelectronics went down sharply in Paris. In Milan, however, there was no such price move. For a short while, immediately after the hopes of the French were literally shot to pieces, a statistically significant gap opened up between the share price of STMicroelectronics in Paris and Milan. And, when Italy got eliminated from the tournament, losing 3-2 to Slovakia two days later, the exact opposite happened. In this case the share price of STMicroelectronics sank in Milan, and there was no such move in Paris. Therefore, soccer-related mood swings are immediately reflected in the stock market of losing countries, as Ehrmann & Jansen conclude.
There can be only one
Kaplanski & Levy (2008) take another, interesting, angle to determine the relationship between the World Cup and stock market returns. It’s plausible that soccer fans do not only invest in their home market. Therefore, Kaplanski & Levy assume that the negative effect of losing a World Cup match will not be limited to local stock markets. In fact, they assume the opposite. Since all, but one, of the participating countries will lose at some point, it’s reasonable to assume something of a global effect. Kaplanski & Levy take the US equity market, the world’s biggest stock market, to test their hypothesis. The result? Taking the returns of all World Cups between 1950 and 2006, they find an average decline of 2.5% for US stocks during the month the World Cup is played. This compares with an average monthly rise of the US stock market of 1.2%, based on all months in the data sample. That is a pretty significant difference of 3.7%. Apparently, investing soccer fans take their frustration over a loss at the World Cup (also) out on the stock market.
Final question, what about the hosting nation? Could that country avoid the return losses that occur during the World Cup? The answer is no. The average return on the stock market of the host nation does not statistically differ from the overall average. This is despite the fact that the home team has won the World Cup quite a few times. Other research, for example done by HSBC focused on the 12 month performance before and after the tournament, reveals that the stock market of the hosting country typically underperforms when play get underway.
Edmans, A., Garcia, D. and Norli, Ø. (2007), Sports Sentiment and Stock Returns. The Journal of Finance, 62: 1967–1998. doi: 10.1111/j.1540-6261.2007.01262.x
Ehrmann, M., Jansen, D, (2014), It hurts (stock prices) when your team is about to lose a soccer match, DNB Working Paper.
Kaplanski, G., and H. Levy. (2008), Exploitable Predictable Irrationality: The FIFA World Cup Effect on the U.S. Stock Market, Working Paper.
Zawadzki, K, (2013), The impact of mega sports events on the stock markets