Losing team’s national stock markets at risk

July 10, 2010


Two national market indexes that may not shine on Monday are those of Spain and the Netherlands, whose soccer teams are scheduled to meet in the World Cup’s championship game on Sunday.

Whichever country’s team loses can expect a drag on its market index of 49 basis points, said Wharton business school professor Alex Edmans. That is the amount that national stock indexes tend to be held back on average on the day after their country is eliminated from the World Cup, according to a paper he published in 2007 with two co-authors, Diego Garcia of the University of North Carolina and Oyvind Norli of the Norwegian School of Management.

In an interview with Reuters, Edmans said his predictions seem to be playing out this year as well, based at least on anecdotal observations. For instance, as an English citizen, Edmans noted ruefully that the FTSE 100 index fell in late June as England’s team played below expectations before being tossed out of the tournament by Germany on June 27 by a score of 4-1.

“As an England fan and an English shareholder I’ve been suffering both ways!” Edmans said.

Edmans’ paper made a splash when an early version was circulated before the 2006 World Cup tournament. It is part of a growing body of academic literature in the field of ‘behavioral economics”. Begun partly in reaction to the extremely theoretical research that had dominated much academic discussion, its practitioners aim for a greater understanding of how human psychology affects their economic decisions.

In the soccer case, for instance, one of Edmans’ conclusions is that sour investor sentiment tied to a team’s misfortune spills over into general negativity about their economic outlook.

Technically, Edmans’ findings do not predict that a national index will fall after a team losses, only that on average it will perform 49 basis points worse than it would otherwise. (The FTSE 100 actually rose 25 points on June 28, the first trading day after England’s loss.) Edmans also said there is little evidence that a market will rise after a team wins a game – perhaps because of fans’ subconscious optimism.

With his team eliminated from the tournament, Edmans said, he does not have a preference between the Netherlands or Spain in the coming final. His interest in the tournament has fallen, he added.

“After England lost, well, it made me try to shut it out of my existence,” he said.

PHOTO: Spain’s coach Vicente del Bosque is seen at the team base in Potchefstroom July 9, 2010. REUTERS/Marcelo del Pozo


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