AgPa #33: World Cups and Stock Markets

Sports Sentiment and Stock Returns (2007)
Alex Edmans, Diego García and Øyvind Norli
The Journal of Finance 62(4), 1967-1998, URL

Given that this week’s AGNOSTIC Paper coincides with the final of the World Cup, I couldn’t resist the temptation. Below you can see a chart of the knockout stage of this year’s tournament (without the final). However, since you are visiting a nerdy finance website, the focus is not on the results, but on the post-match stock market returns of the playing countries…

Let’s forget our statistical education for a moment and just take a look at the pattern. The chart shows net returns of MSCI country indices for each nation at the trading day after the respective match. I also report the relative return to the MSCI ACWI index as a global benchmark and to control for general market movements. On average, the stock market of the losing country underperformed both the stock market of the winner and the global benchmark. The magnitude is actually quite striking. The average return spread for this year’s tournament amounts to 0.4% (-0.4% return on Winners, -0.8% on Losers) over a period of just two weeks. Although it may not sound like a big deal, a two-week return of 0.4% compounds to almost 11% per year which is obviously quite attractive.

Now, you may (understandably) say that this is some nice storytelling but not much more. Well, I must disappoint you. I didn’t made this up to create a story but the idea of this analysis actually comes from this week’s AGNOSTIC paper which was published in the Journal of Finance, one of the top journals in the world.[1]As you hopefully recognized from my other work, I believe there is way too much storytelling in investment management and I have absolutely no desire to participate in that… So let’s see how it works…

Everything that follows is only my summary of the original paper. So unless indicated otherwise, all tables and charts belong to the authors of the paper and I am just quoting them. The authors deserve full credit for creating this material, so please always cite the original source.

Setup and Idea

The main idea of this week’s paper is very simple. If their country drops out of the World Cup, people tend to be depressed (at least most of them). This probably not only applies to “normal” people but also to investors. And when enough investors are in a bad mood that could have an impact on stock prices. Following this logic, the days after important sport events are therefore an interesting setup to study sentiment effects in stock markets.

The authors of this week’s paper present a lot of evidence that the results of important sport events like the World Cup have real economic consequences. For example, they cite research showing that after a penalty shoot-out between Argentina and England, hospital admissions because of heart attacks increased by 25%. In addition to that, the sheer number of people who watch important sport events suggests that the results have some impact on the mood of entire countries.[2]Of course, you can make up a lot more arguments. For example, people celebrating the victory of their countries’ team may be less productive at work on the following day.

Data and Methodology

To test this hypothesis, the authors collect data on soccer results from World Cups, European Championships, Copa Americas, and the Asian Cups between 1973 and 2004. The final sample includes 1,162 soccer matches between 39 countries (638 wins, 524 losses) from the tournaments and the respective qualifying games. Given that the skill of the countries is obviously different, the authors also use a standardized skill-rating to identify “important” matches between reasonably similar opponents. Matches of the knockout stages are generally considered important.

For a later robustness test, the authors also collect data on cricket, rugby, ice hockey, and basketball matches from various sources. With respect to stock market data, they use total return return indices for each country from Datastream. The authors also specifically mention that they use returns in local currency because this is likely the most relevant metric for domestic investors. To examine the impact of sport results on stock markets, the authors simply look at the return of the first trading day after the respective match. In good scientific manner, they of course also control for various other effects like the day of the week or global market movements.

Important Results and Takeaways

Stock markets of losing countries tend to underperform after important matches

The average stock return on days after international soccer losses is -0.184% across all countries in the sample.[3]So with the -0.8% for 2022, we are (so far) considerably below average. This number is also statistically significantly below zero and compares to a return of 0.05% for the days after wins, and 0.058% for days without proceeding soccer matches. So the effect is asymmetric. There are negative returns after losses but no significant positive returns after wins.

This effect is very consistent across different sub-samples (World Cup elimination, Continental Cups, etc.) and other sport results (cricket, rugby, ice hockey, basketball). In fact, in 9 out of 10 sub-samples, the average return on days after losses is considerably lower than on days after wins. This simple analysis already indicates that the results are probably not random and that there may be a real (behavioral) effect.

In the next step, the authors present an econometric approach to control for other effects like days of the week, preceding weekends, or the return on a global benchmark. The results remain mostly unchanged. Stock markets of countries that lose in important soccer or sport matches tend to earn significantly negative returns on the following trading day. This pattern increases with the importance of matches, for example it is most relevant for the elimination phase of World Cups.

With this in mind, the above numbers for the World Cup 2022 are fully in line with expectations. Stock markets of losing countries posted negative returns on the following trading days. Similarly, there is no clear pattern for the stock markets of winning countries. To reintroduce some statistical seriousness, however, one World Cup is of course just a small sample compared to the authors’ data. Nonetheless, I still believe it is cool to see the effect in the current tournament.

The effect most likely comes from bad mood after sport losses

After documenting a statistically robust pattern, the logical question becomes what drives this effect? As always in finance, there are two options. Either there are plausible (“rational”) reasons why stock returns tend to be negative after sports losses, or investors are (“irrationally”) depressed and bid down prices more than justified.

The authors explore both explanations, however, they rather quickly conclude that the behavioral story appears more plausible. For example, they show that the negative returns after sport defeats are inconsistent with different types of “rational” betting on sport results. They also show that the impact of sport results is larger for stocks with higher local ownership. This is again in line with the idea that domestic investors are in a bad mood after their team lost an important match and behave accordingly on the next trading day.

It is always difficult to isolate such behavioral effects and we can never really “proof” them. However, I believe the authors performed some creative stress-tests and the results are quite reliable. They are also quite similar to the impact of music sentiment and weather that I earlier reviewed in this series. So I think there is indeed evidence that investors’ mood has an impact on prices.

Conclusions and Further Ideas

If today wouldn’t have been the final of the World Cup, I probably wouldn’t have picked this paper. I really like the creative idea, the strong scientific methodology, and I also believe the results are interesting and relevant. The practical application, however, is somewhat limited. The authors even mention this themselves and conclude that “[…] the events we cover do not occur with enough frequency to justify a portfolio fully dedicated to trading on them.” They are academics and portfolio management is not their job. So this is absolutely no critique.

That said, the strategy would have worked quite handsomely in 2022. Shorting the stock markets of countries playing against each other in the knockout stage (so far) would have yielded a nice 1.2% pre-cost profit over a period of just 13 days.[4]To test the strategy without look-ahead bias, we must assume that we place trades on the trading day before the match. So we don’t know at the time of the trade which team will win and can only bet on the return spread between winners and losers… This is quite attractive and maybe indeed an interesting addition for some multi-strategy funds.

At the time of writing this, Croatia just won the third place play-off against Morocco. By now, it is also clear that Argentina is the World Champion 2022. So keep an eye on the stock markets of Morocco and France tomorrow…

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