(Update 15 July)
The 2014 World Cup is now over. After Argentina's loss in the final, its market was up 0.2%, underperforming the world index which rose by 0.6%. Germany's index rose 1.2% - the biggest gainer among the major European indices.
Excluding the anomalous Brazil defeat (which is explained 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 "big seven" soccer nations (England, France, Germany, Italy, Spain, Argentina, Brazil) was followed by underperformance by 0.4% on average.
Thanks to everyone who followed this post as the World Cup unfolded. A series of three interviews that I did on CNN on the effect of the 2014 World Cup on stock markets is here.
(Update 11 July)
So far this World Cup, most defeats have been met by national stock market declines. Indeed, Holland's market fell by 1.7% on Thursday after being eliminated by Argentina on Wednesday, while the world market fell only 0.7%. But, after Brazil's 7-1 humiliation by Germany on Tuesday, the stock market rose 1.8% on Thursday (the market was closed on Wednesday), while the world market fell 0.4% over Wednesday and Thursday. 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 think it significantly increases the chances that socialist President Dilma Rousseff will be ousted in October's elections and be replaced by Aecio Neves, the leader of the more pro-business PSDB party. The economy has been mired in stagflation under Rousseff's presidency. Her popularity may be particularly tied to the soccer 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.
Is this just clutching at straws to make an excuse for a major contradictory data point? In fact, this hypothesis was predicted even before the start of the World Cup. UBS analysts argued that a Brazilian exit would boost the stock market by hindering Rousseff's re-election bid, and Brazil's Ibovespa stock index had risen 19% from a low on March 14 due to speculation that the economy's poor performance would lead to her being ousted. Overall, out of the 38 losses by a country with an active stock market, 25 have been followed by the national stock market doing worse than the world market.
Moreover, the stock market increase upon seemingly bad news is consistent with a more general phenomenon studied in one of my other papers, with Itay Goldstein (Wharton) and Wei Jiang (Columbia). Typically, we think that a high stock price suggests that the CEO is doing well. But in fact, a high stock price may suggest that the CEO is doing badly - so badly that investors think that the firm will be the target of a hostile takeover, and so bid up the price. Thus, there's an interesting two-way relationship between prices and real decisions. A low price may trigger a corrective action (e.g. hostile takeover of a CEO, replacement of a President) - but the expectation of the corrective action drives the price up.
Indeed, Commerzbank was a takeover target around the financial crisis due to its poor performance. It was believed to have adopted a rather unusual takeover defense - it spread rumors that it was a takeover target, to increase its stock price, preventing a takeover from ultimately occurring! Thus, stock prices may be self-defeating - prices prevent the very actions that they anticipate.
As Shakespeare's Hamlet said, "thinking makes it so". But in financial markets, "thinking may make it not so".
(Update 9 July)
At the time of writing, Germany is the only major European stock market that's up - all other European stock markets are down due to negative economic news. Luckily for Brazil, their stock market is closed for a public holiday to mark a constitutional revolt in 1932.
(Updated 8 July)
The 2014 World Cup is now over. After Argentina's loss in the final, its market was up 0.2%, underperforming the world index which rose by 0.6%. Germany's index rose 1.2% - the biggest gainer among the major European indices.
Excluding the anomalous Brazil defeat (which is explained 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 "big seven" soccer nations (England, France, Germany, Italy, Spain, Argentina, Brazil) was followed by underperformance by 0.4% on average.
Thanks to everyone who followed this post as the World Cup unfolded. A series of three interviews that I did on CNN on the effect of the 2014 World Cup on stock markets is here.
(Update 11 July)
So far this World Cup, most defeats have been met by national stock market declines. Indeed, Holland's market fell by 1.7% on Thursday after being eliminated by Argentina on Wednesday, while the world market fell only 0.7%. But, after Brazil's 7-1 humiliation by Germany on Tuesday, the stock market rose 1.8% on Thursday (the market was closed on Wednesday), while the world market fell 0.4% over Wednesday and Thursday. 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 think it significantly increases the chances that socialist President Dilma Rousseff will be ousted in October's elections and be replaced by Aecio Neves, the leader of the more pro-business PSDB party. The economy has been mired in stagflation under Rousseff's presidency. Her popularity may be particularly tied to the soccer 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.
Is this just clutching at straws to make an excuse for a major contradictory data point? In fact, this hypothesis was predicted even before the start of the World Cup. UBS analysts argued that a Brazilian exit would boost the stock market by hindering Rousseff's re-election bid, and Brazil's Ibovespa stock index had risen 19% from a low on March 14 due to speculation that the economy's poor performance would lead to her being ousted. Overall, out of the 38 losses by a country with an active stock market, 25 have been followed by the national stock market doing worse than the world market.
Moreover, the stock market increase upon seemingly bad news is consistent with a more general phenomenon studied in one of my other papers, with Itay Goldstein (Wharton) and Wei Jiang (Columbia). Typically, we think that a high stock price suggests that the CEO is doing well. But in fact, a high stock price may suggest that the CEO is doing badly - so badly that investors think that the firm will be the target of a hostile takeover, and so bid up the price. Thus, there's an interesting two-way relationship between prices and real decisions. A low price may trigger a corrective action (e.g. hostile takeover of a CEO, replacement of a President) - but the expectation of the corrective action drives the price up.
Indeed, Commerzbank was a takeover target around the financial crisis due to its poor performance. It was believed to have adopted a rather unusual takeover defense - it spread rumors that it was a takeover target, to increase its stock price, preventing a takeover from ultimately occurring! Thus, stock prices may be self-defeating - prices prevent the very actions that they anticipate.
As Shakespeare's Hamlet said, "thinking makes it so". But in financial markets, "thinking may make it not so".
(Update 9 July)
At the time of writing, Germany is the only major European stock market that's up - all other European stock markets are down due to negative economic news. Luckily for Brazil, their stock market is closed for a public holiday to mark a constitutional revolt in 1932.
(Updated 8 July)
In an earlier post I summarized my paper (with Diego Garcia and Oyvind Norli) which shows that international football defeats lead to declines in the national stock market index. Controlling for other drivers of stock returns, a World Cup defeat leads to a next-day fall of 0.4%, and a defeat in the elimination stages leads to a next-day fall of 0.5%. We also found that the effect was stronger in England, France, Germany, Spain, Italy, Argentina, and Brazil. A brief, humorous, 5-minute talk about the paper is here.
How has this theory played out in the 2014 World Cup so far? Typically you find that stock market effects get weaker after a paper is published, because investors are aware of the effect and trade against it. However, we have indeed seen stock market declines after defeats in this World Cup. Across all countries with a stock market index, a defeat has led to the index falling by 0.2% faster than the MSCI World index. Moreover, defeats by the "big seven" countries (notably England, Spain, and Italy) have led to declines of 0.5%. Out of the 36 defeats by countries with an active stock market, 24 have been followed by market declines faster than the MSCI World.
Let's look at some of the most negative stock market responses:
Spain 1-5 Netherlands. The Spanish market fell by 1% the next day, 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.
Switzerland 2-5 France. The Swiss market fell by 0.7%, while the world market was flat. While this loss wasn't too unexpected, the magnitude of the defeat was severe - Switzerland were down 0-5 until late in the game.
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.
France 0-1 Germany. The French market fell by 1.4%, while the world market fell 0.5%. Clash of two leading nations in the quarter-finals, both of which harbored hopes of winning the competition.
However, not every result has been consistent with the theory. Some losses have been accompanied by stock market increases, perhaps because these losses actually boosted national mood:
Croatia 1-3 Brazil. The Croatian market rose 0.4%, while the world market rose by 0.3%. This result did not worsen Croatian national mood, as they were believed to have played well and lost to unlucky refereeing decisions.
Bosnia 1-2 Argentina. The Bosnian market rose 0.5%, while the world market was flat. This was Bosnia's first appearance in a World Cup and the consensus was they played very well.
Australia 2-3 Netherlands. The Australian market rose 1.5%, while the world market rose 0.9%. Australia's performance was widely praised by the press afterwards, in contrast to the significant negative coverage of the team before the tournament.
Greece 1-1 Costa Rica (3-5 on penalties). The Greek market rose 0.4%, while the world market rose 0.1%. This was the first time Greece advanced through the group stages and so the nation was happy with the team's performance in the overall World Cup.
However, there were a couple of losses that did lead to a decline in national mood, yet still were accompanied by stock market increases. Clearly, football results aren't the only factor that drives stock returns, because there may be some major economic news. For example, when Spain lost 2-0 to Chile, the market went up by 0.7% the next day (while the world market rose 0.5%), due to news of a new king.
In addition, there have been losses that were accompanied by stock price declines and thus consistent with the theory, but likely these declines were caused by other factors. For example, when Nigeria lost 3-2 to Argentina, the market fell 0.6% the next day. However, Nigeria had already qualified so the loss wasn't particularly painful; the market decline was likely due to the terror attack in the capital on the same day.
While there might be particular occasions where economic news overshadows the mood impact of a football result, these idiosyncratic events will even out in a large sample. Thus, the initial paper studied 1,100 football matches (plus 1,500 matches in rugby, cricket, basketball, and ice hockey) to find the average effect of football defeats on the stock market. A football loss won't lead to a stock market decline in every single case, but it does on average, and this has been borne out by the 2014 World Cup so far.
(Thanks to LBS PhD student David Schoenherr for his help in gathering the data for this World Cup.)
