The World Cup, which starts today, will spark a huge range of human emotions, from the excitement of victory to the despair of defeat. The effect of football results on national mood is so strong that it can spill over into the stock market and cause swings of billions of pounds. Why?
While the World Cup pits arch-rivals against each other, raring to settle scores of decades past, there are also long-standing feuds in the halls of academia. The equivalent of England-Germany is the debate over what drives financial markets. The “efficient markets” camp argues that the price of a share incorporates every single piece of relevant information: management quality, product mix, growth options, and so on. Prices end up at the theoretically “correct” fundamental value, as if calculated by an infinitely powerful computer.
The “behavioural finance” team points out that traders aren’t computers, but humans. They’re prone to mistakes and psychological biases. Thus, share prices are affected not only by fundamentals, but also by emotions. Internet shares were wildly expensive in the late 1990s, not because these companies’ prospects were stellar, but because investors had become irrationally exuberant.
Refereeing the “efficient” versus “behavioural” match is extremely difficult. One way to settle the tie would be to compare actual prices against the theoretical “correct” value based on fundamentals. But we don’t know what the “correct” value is. It could be that, based on information at the time, internet shares were fairly valued in the late 1990s, and the subsequent crash only occurred because bad news unexpectedly came out afterwards.
But there is another tactic we can use – study whether prices are affected by emotions. Previous papers looked at whether weather affects the stock market. However, weather isn’t correlated across a country. If it’s sunny in London but cloudy in Manchester, it’s not clear what will happen to the overall stock market. Moreover, the effect of weather is unlikely to be strong enough to drive your trading behaviour, particularly since traders work in insulated offices.
That’s why I chose to look at sports. Sports have huge effects on people’s emotions, these are far stronger than the effects of weather, and they can’t simply be neutralised by the office environment. When England lost to Argentina in the 1998 World Cup, heart attacks increased over the next few days. Suicides rise in Canada when the Montreal ice hockey team loses in the Stanley Cup, and murders go up when the local American Football team loses in the playoffs. International sports, like the World Cup, affect the whole nation in the same way, and lead to a large effect on national mood that is correlated across a country.
Together with co-authors Diego Garcia and Oyvind Norli, I investigated the link between 1,100 international football matches and stock returns in 39 countries in our paper Sports Sentiment and Stock Returns. The results were striking. Being eliminated from the World Cup leads to the national market falling by 0.5 per cent on the next day – controlling for everything else that might drive stock returns. Applied to the UK stock market, this translates into £10bn wiped off the market in a single day, just because England loses another penalty shootout.
The effect is stronger in the World Cup than the European Championship, which makes sense because the World Cup is the bigger stage and conjures up even more emotion. It’s stronger in the elimination stages than the group stages, because if you lose you’re instantly out. It’s also stronger in football-crazy countries like England, France, Germany, Spain, Italy, Argentina and Brazil. We also studied 1,500 other international sports matches and found a similar effect in one-day cricket, rugby, and basketball. We ruled out the explanation that the market declines are due to the economic effects of losses (e.g. reduced sales of replica merchandise, or reduced worker productivity).
Depressingly, we found no effect of a win in any sport. One reason could be that sports fans are notoriously over-optimistic about their team’s prospects. If fans go into each game expecting they’ll win, there’s little effect if they do win, but they become depressed if they lose. Another is the asymmetry of the competition: winning an elimination game merely sends you into the next round, but losing leads to instant exit.
The 2014 World Cup
How did this play out in the 2014 World Cup? Excluding the anomalous Brazil defeat (which I explain below), out of the 39 losses by a country with an active stock market, 26 (= two thirds) were followed by the national market underperforming the world market. A loss was followed by underperformance by 0.2% on average; a loss by the seven football-crazy countries was followed by underperformance by 0.4% on average. A series of three interviews I did with CNN’s Richard Quest is here.
Some examples of declines following defeats are below:
- Germany 1-0 Argentina (Final). Argentina’s market rose 0.2%, while the world market rose 0.6%.
- Holland 0-0 Argentina (2-4 on penalties, Semi-Final). Holland’s market fell by 1.7%, while the world market fell 0.7%.
- France 0-1 Germany (Quarter-Final). The French market fell by 1.4%, while the world market fell 0.5%. Clash of two leading nations, both of which harbored hopes of winning the competition.
- Spain 1-5 Netherlands. The Spanish market fell by 1%, while the world market went up by 0.1%. This was a crushing and surprising defeat by the reigning world champions.
- England 0-1 Italy. The English market fell by 0.4%, while the world market was flat.
- Japan 1-2 Ivory Coast. The Japanese market fell by 1%, while the world market was flat. Japan went into the tournament with high expectations since the general consensus was that they had an easy group.
- Italy 0-1 Costa Rica. The Italian market fell by 1.5%, while the world market was flat. This was perhaps the biggest shock of the World Cup so far, and severely jeopardized Italy’s chances of qualifying.
- Italy 0-1 Uruguay. The Italian market fell by 0.5%, while the world market was flat. Italy were eliminated from the World Cup.
- Japan 1-4 Colombia. The Japanese market fell by 0.7%, while the world market was flat. Japan were eliminated from the World Cup. A win would have seen them through against an already-qualified Colombia team that rested several players.
- Korea 0-1 Belgium. The Korean market fell by 0.3%, while the world market was up 0.2%. Korea were eliminated from the World Cup by a Belgian side that rested several players and was down to ten men for half of the match.
- Nigeria 0-2 France. The Nigerian market rose 0.3%, while the world market rose 0.7%. Nigeria were eliminated from the World Cup.
But, after Brazil’s 7-1 humiliation by Germany in the semi-finals, the stock market rose 1.8%, while the world market fell 0.4%. Surely this disproves the theory?!
Actually, the Brazil situation has an interesting twist. Here, the market rose because the defeat was so bad that investors thought it significantly increased the chances that socialist President Dilma Rousseff would be ousted in October’s elections and be replaced by Aecio Neves, the leader of the more pro-business PSDB party. The economy had been mired in stagflation under Rousseff’s presidency. Her popularity was particularly tied to the football team because she chose to spend billions on stadiums for the World Cup instead of keeping her pre-election promises to spend on schools, hospitals, and general infrastructure. So, for this game also, sports results affected the stock market, but for very different reasons.