Very often, market participants find it difficult to attribute any reason to market movements. The usual response to a question on why stock prices have moved in a particular way is put down to “sentiment”. There has been a lot of research on how stock markets are affected by mood. For instance, a paper by Carroll et al (2002) found the very interesting fact that admissions for heart attacks in the UK increased by 25% during the three-day period starting 30 June 1998, the day England lost to Argentina in a football World Cup penalty shootout. Edmans, Garcia and Norli cite several other research papers on the connection between results in sports and general well-being.
The authors say that “a mood variable must satisfy three key characteristics to rationalize studying its link with stock returns. First, the given variable must drive mood in a substantial and unambiguous way, so that its effect is powerful enough to show up in asset prices. Second, the variable must impact the mood of a large proportion of the population, so that it is likely to affect enough investors. Third, the effect must be correlated across the majority of individuals within a country.” They believe that international soccer results meet all these criteria and study stock market movements in 39 countries during World Cup football matches.
The authors also expanded the scope of their study to investigate the effect on the markets of rugby, ice hockey, cricket and basketball results, but they say that the impact of soccer is much greater, since it is the most followed sport in the countries that they studied by a wide margin.
What are the results? The authors find that losses in international soccer matches depress the national mood in the losing country and “have an economically and statistically significant negative effect on the losing country’s stock market”. For example, a loss in the World Cup elimination stage leads to a next-day abnormal stock return of minus 49 basis points. But they find no corresponding positive impact after wins in soccer matches. That’s because soccer fans seem to expect their own teams to win, so a win is not taken as a great surprise, while a loss is.
The other reason is that often while a win merely advances the country to the next stage, a loss eliminates it from the competition. The paper also finds that the effect is more pronounced in small stocks, which have more local investors and are therefore more strongly affected by the negative sentiment from a loss for the national team.
And finally, the researchers also find that the impact is smaller for the other sports such as rugby, cricket and basketball.
Incidentally, the researchers also test the hypothesis whether the fall in the market is due to investors suffering from a hangover after a losing match and conclude that it isn’t true.
If the conclusions of this paper are correct, one could construct a market strategy of shorting the markets that play in the World Cup to take advantage of the skewed outcomes—you win if they lose, and nothing happens if they win. But with small stocks being affected the most, such a strategy will be difficult to execute.
In India, considering the national obsession over cricket, we badly need a research paper on the link between cricket matches and stock market returns.
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