Watching World Cup makes sense while watching stock ticker?

For example, elimination from a major international soccer tournament is associated with a next-day return on the national stock market index that is 38 basis points lower than average. Surprisingly, victories — even in crucial games — have no positive impact.

The logic that explains stocks going down after a loss: investors become pessimistic about things in general if their country loses. And the logic that explains why they don’t rise if a country wins: since people by and large want their teams to win anyway, an actual victory doesn’t improve investor optimism.

Struck by the idea over a ski trip last year, the professors were laughed upon when they first discussed the idea with peers. But they were convinced. After all, the cumulative number of television viewers that followed the 2002 World Cup exceeded 25 billion, the Brazil-Germany final was viewed by over a billion and more than 20 million Italians watched their national team in the final stages of the World Cup or European Cup.

Investigating over 1,100 soccer games from January 1973 through December 2004 (including the World Cup, the European Championship, Copa America and Asian Cup) with data from the stock markets of 39 countries, they validated their hunch.

They found the size of the loss effect is “economically significant in monthly terms, the excess returns associated with a soccer loss exceeds 7 per cent,” Garcia told The Indian Express.

In plain English, if you were to use a strategy that bets on both countries’ stockmarkets tanking on the day after international soccer matches, you could make a cool seven per cent a month. And unlike betting, you don’t have to predict the winner.

Edmans, who presented the paper at Yale last Friday to an enthralled academic audience, notes that “the loss effect is particularly strong in 7 of the 39 countries studied.” These are Italy, Spain, France, Germany, Brazil, Argentina, and England.

Consider this. When England lost to Sweden in the 1992 Euro Championship, the local market tanked 1.33 per cent. The 1990 World Cup semi-final loss, in which Germany prevailed over England after a penalty shootout, led to a 1.04 per cent market decline.

In the last World Cup again, when England lost to Brazil, the market fell 1.32 per cent the next day. That’s not all — this contagious mood from a soccer match loss is more pronounced for games in the World Cup and for elimination games in other contests.

Also, the negative effect is especially large on small stocks — as they are predominantly held by local investors and not foreign institutions, making them more susceptible to locals’ bad mood.

Sports outcomes have been linked to public mood before, but never with financial markets. A 1987 study found that two games played by Germany in the 1982 World Cup, including the final in which Italy thrashed Germany 3-1, significantly changed Germans’ assessments of their own well-being and their view on national issues.

Admissions for heart attacks increased by 25 per cent in the three days from June 30, 1998 — the day England lost to Argentina on a World Cup penalty shootout. Elimination from the US National Football League playoffs has been found to cause a significant increase in homicides in the losing cities.