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The World Cup Effect at Trader’s Narrative

The World Cup Effect

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There is a very interesting study coming out in The Journal of Finance that looks at the connection between wins and losses in the World Cup and the respective stock markets of the countries involved.

Authored by economists Edmans, Garcia and Norli, the paper does some serious number crunching to show that losses in the world cup translate into stock market declines the next trading day. And as you would expect, the more that is at stake, the larger the decline that the loss causes:

world cup 1.png

As noted in the graph above, the effect of wins and losses is not the same magnitude. Human nature being what it is, disappointment is more bitter than the sweetest victory.

So I guess we now have the “World Cup Effect” to add to our basket of behavioral finance anomalies. The choice of the world cup is very wise as it is the most widely played, watched and followed sports event on earth - even larger than the olympics. Other sports just don’t evoke the same visceral reaction:

world cup 2.png

Source: Canadian Business magazine.

So does this mean with the elimination of Germany we short the DAX and go long the Mibtel? What about Brazil’s game against France? Long CAC and short Bovespa? The more pressing question for me is where in the world was the Brazilian defense during that game? Sheesh.

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