On Friday June 9th, Costa Rica will face off against host Germany in the inaugural match of the 2006 FIFA World Cup.
Researchers show that a loss in a significant international match can lead to a loss in a country's stock market the next day. Three economists -- Alex Edmans, of MIT, Diego García of Dartmouth College and Oyvind Norli of the Norwegian School of Management -- reveal their findings in a forthcoming paper in the Journal of Finance.
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| David Beckham, Captain of England |
The more critical the game, the authors found, and the more important soccer or football was for a country, the bigger the effect of a loss on stocks. In Europe, the loss effect seems especially pronounced. Wins don't seem to have the same positive impact on stocks.
Though their intention is to study the effects of national mood on stocks, the authors hypothesize investors could take advantage of loss effect by, say, betting against stocks of both countries before an important match.
Abstract
The paper investigates the stock market reaction to sudden changes in investor mood. Motivated by psychological evidence of a strong link between sporting outcomes and mood, and the worldwide importance of soccer, the researchers use international football results as the primary mood variable. They find an economically and statistically significant market decline after football losses.
Daily stock returns are 38 basis points lower than average following a loss in elimination games—such as the FIFA World Cup final stages. This loss effect is stronger in small stocks and more important games, and robust to changes in estimation methodology and to the removal of outliers in the data. They also document a stock market loss effect using cricket, rugby, ice hockey, and basketball games in countries where these sports are popular.
Download paper.
