25 March 2019
Stock markets could be impacted by the World Cup match results, according to a study. Photo: Reuters.
Stock markets could be impacted by the World Cup match results, according to a study. Photo: Reuters.

World Cup elimination could wipe billions from stock markets

Stock markets could be impacted by the World Cup match results, according to a study led by Alex Edmans, a professor of finance at the London Business School.

The study, based on analyses of 1,100 football matches, 1,500 other sports matches, and stock market performances in 39 countries, found a link between sports sentiment and stock returns. It said a loss by the England national football team in the 2018 FIFA World Cup in Russia had the potential to wipe tens of billions of pounds off the London stock market.

In an email interview with EJ Insight, Professor Alex Edmans shares his observations and analysis of stock performance during the month-long football tournament.

EJ Insight: What are the findings of your research on sport sentiment and stock returns?

Edmans: In the study, we found that a loss in an elimination match of the football World Cup triggered a 0.5 percent fall in the country’s national market the next day – even after controlling for movements in the world markets. Applied to the England stock market, that’s 12 billion pounds (US$15.7 billion).

We also discovered that a loss by a national sporting team had a greater impact on financial markets when the prestige of the competition was greater (FIFA World Cup versus the UEFA European Championship). Similarly, the effect on markets was more pronounced when a loss led to the side’s immediate elimination from a competition. The loss of a match also had a greater impact on financial markets in footballing nations like England, Germany, France and Spain where the sport was particularly popular.

From observing the 2014 World Cup, a loss was followed by underperformance by 0.2 percent on average; a loss by the seven football-crazy countries was followed by underperformance by 0.4 percent on average.

Below are some examples of stock market declines following World Cup match defeats:

 France 0-1 Germany (Quarter-Final). The French market fell by 1.4 percent, while the world market fell 0.5 percent. Clash of two leading nations, both of which harbored hopes of winning the competition.

 Spain 1-5 Netherlands. The Spanish market fell by 1 percent, while the world market went up by 0.1 percent. This was a crushing and surprising defeat by the reigning world champions.

 Japan 1-2 Ivory Coast. The Japanese market fell by 1 percent, 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 percent, 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.

Q: How would the performance of a national team in an international competition have an impact on the investors’ emotions and trading decisions?

A: There has been a debate over what drives financial markets. The “efficient markets” camp argues that the price of a share incorporates every single piece of relevant information: management quality, product mix, growth options, and so on. Prices end up at the theoretically “correct” fundamental value, as if calculated by an infinitely powerful computer. The “behavioral finance” team points out that traders aren’t computers, but humans. They’re prone to mistakes and psychological biases. Thus, share prices are affected not only by fundamentals, but also by emotions.

Sport is an emotional topic for millions of people, including professional and personal investors, and they can’t simply be neutralized by the office environment. Their trading decisions are affected by mood, so the performance of a national team in an international competition can have major financial repercussions that reach far beyond the playing field.

When England lost to Argentina in the 1998 World Cup, heart attacks increased over the next few days. Suicides rise in Canada when the Montreal ice hockey team loses in the Stanley Cup, and murders go up when the local American Football team loses in the playoffs. International sports, like the World Cup, affect the whole nation in the same way, and lead to a large effect on national mood that is correlated across a country.

Q: Would a winning game trigger positive emotions in market trading in nations like England, Germany, France and Spain where the sport was particularly popular?

A: We found no effect of a win in any sport. One reason could be that sports fans are notoriously over-optimistic about their team’s prospects. If fans go into each game expecting they’ll win, there’s little effect if they do win, but they become depressed if they lose. Another is the asymmetry of the competition: winning an elimination game merely sends you into the next round, but losing leads to instant exit.

2018 World Cup 

Q: How would you apply the research to this year’s tournament, the World Cup in Russia?

A: After the final games, England was down 0.8 percent and Croatia 0.3 percent after their respective defeats while world market was flat on Monday. The stock market reactions to the teams that were eliminated in the second round during the weekend of 2-3 July were particularly brutal. The world market fell only 0.4 percent, but Argentina, Mexico, Japan, and Portugal fell 2.8 percent, 2.2 percent, 2.2 percent, and 0.6 percent respectively.

Of course, this is only an average result and won’t occur in every situation, particularly since other factors may drive the stock market on a particular day. For example, after its elimination to Croatia in the semi-finals, the UK market rose 0.8 percent, in line with the broader market as world equities rebounded in general from the previous day’s steep falls which resulted from mounting trade tensions between the US and China.

Q: There were some surprising match results at the 2018 World Cup. Which game did you think would be most impactful to (or likely to impact) the stock markets?

A: After last season’s champion Germany’s shocking defeat to South Korea and elimination on 27 June, its stock market fell 1.4 percent the next day while the world market was flat. The German market also fell 1.4 percent after its loss to Mexico on 18 June, while the world market fell only 0.4 percent. Another arguably surprising loss was Argentina’s second match day in the group stage against Croatia. However, the Argentinian market went up the next day, but that’s because of another major event that happened – Argentina was just promoted from “frontier market” to “emerging market” at the time by the MSCI stock index, which is expected to attract fresh inflows of US$2.5 billion into Argentine equities.

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EJ Insight writer

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