World Cup: Soccer and the Stock Market - Market News | Financial Buzz

World Cup: Soccer and the Stock Market

 Tim Howard, Stock Market, VolatilityThe stock market has been in a trance the past couple weeks as trading volumes are down substansially from the same point as a year ago. As investors are left wondering what is causing the lack of volatility, at the moment there is at least one explanation- the World Cup!

With 3.5 billion people expected to tune in to watch the tournament, the world’s most popular game is drawing viewers towards television screens and away from the trading pit. Volatility aside, the World Cup may be causing some other quirky market behavior as well.

Low Volatility

It’s human nature to look for distractions from the daily grind, and the stock market being controlled by humans (mostly) is no different. Though trading volumes usually fall during the summer months, researchers noticed the effect is even more pronounced every four years in the months coinciding with the World Cup. In 2010, the European Central Bank actually did a study on the phenomenon and documented some very convincing statistics.

The study looks at what happens to the trading volumes in domestic exchanges of countries during a soccer match when compared to its average volume. In the United States, for example, trading volume falls around 20% during any given match. When the USA is one of the teams playing that figure doubles to 40%. The effect is most pronounced in Chile where trading volume falls 79% during other nations’ matches, and an astounding 99.5% when the Chilean national team on the field.

A Loss Goes Beyond the Pitch

When a team is defeated in the World Cup, especially in the knockout round, they aren’t the only ones who lose. According to Alex Edmans, a professor at Pennsylvania University’s Wharton School of Business, a loss in the knockout stage means on average a 0.5% loss in the stock exchange for that particular nation the following day. The reason? It has to do with the psychology of the market. When a national team loses, the mood of the investors in that country is dampened and that translates to a sub-par stock performance. The effect is exacerbated in small-cap stocks and in more meaningful games, such as the semis and finals.

Conversely, the team that wins the World Cup sees its stock index outperform the global average by 3.5% in the following month. Aside from winning the entire tournament though, the effects of winning a match are negligible. Researchers attribute this to the fact that viewers are more sensitive to losses than they are to wins, just as most people are more emotional about losing money than gaining it.

What’s it mean for the USA?

By now most of you have already received the news of the US national team’s 2-1 loss to Belgium yesterday evening. So should be expect a soccer related sell-off? Actually, the US might be insulated from the effect since most of the world trades predominantly on US markets, not just Americans still sour from the loss. In fact, it wouldn’t be much of a stretch to say that most Americans are content with yesterday’s result because of the stellar, record breaking performance given by goalkeeper Tim Howard. If this is true maybe we can expect a true soccer finish in today’s markets- a draw.

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