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The World Cup and Stock Returns

Jim Mahar points to a recent paper on the intersection of finance & football:

Daily stock returns are 39 basis points lower than average following a loss in a World Cup elimination match. This football-loss effect is robust to changes in estimation methodology and to the removal of outliers in the data. It is particularly strong for more critical games, in recent years, and in countries where football is especially important. Controlling for the pre-game expected outcome, we are able to reject that the football-loss effect is caused by economic factors such as reduced productivity or lost revenues. Coupled with the size of the effect and its concentration in small stocks, we suggest that the football-loss effect stems from the impact of football on investor mood.

The authors promote this result as evidence of irrationality, and support for "behavioral finance." This is a popular topic these days, but I'm not a promoter of that way of thinking. I think its emphasis on anomalies gives short shrift to the first order effects of pricing in financial markets. Nevertheless, we may have a true - and interesting! - anomaly here.

On a skeptical note, a quick reading suggests that the authors' support for the claim that no real economic effects exist is very weak. Further, Dennis Coates and Brad Humphreys found a small positive effect on a city's economy from winning the NFL Super Bowl. So there is a basis for linking the outcome of major sporting events to the spirit, and the productivity of people in a region.

Both papers suggest that winning (or losing) major sporting events affects the mood of a team's fans. And that mood matters, economically speaking. But I doubt that the effects are confined only to investor sentiment, and nowhere else in the economy.