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FĂștbol moves markets

6/9/2014

UNC Kenan-FlaglerGoldman Sachs has predicted that Brazil will win the 2014 World Cup. After Brazil, the betting odd favorites are Argentina, Germany and Spain. The rest of the countries are likely to get some bad news.

The world’s most popular game can have a financial down side, too.

If Brazil doesn’t win, there could be a negative effect on the Brazilian stock market, according to Diego García, a finance professor at UNC Kenan-Flagler. And that holds true for other countries with teams competing in the World Cup.

García investigated the effect of investor sentiment on asset prices with Alex Edmans of London Business School and Oyvind Norli of the Norwegian School of Management. The Journal of Finance published their findings, “Sports Sentiment and Stock Returns,” in 2007.

They studied stock market reaction to sudden changes in investors’ mood, such as those that occur when England gets eliminated from the World Cup. Using international soccer results as the primary variable for mood, they found a significant market decline after soccer losses, but virtually no effect after wins.

The magnitude of the loss effect was significant. A loss in a World Cup elimination stage led to a next-day abnormal stock return of -49 basis points, a few million pounds off the FTSE. This loss effect was stronger in small stocks – and in more important games.

They found the loss effect was just as strong in data from the second most popular sport in the world: cricket.

While the reasons behind the evidence uncovered by his research are open to debate, 31 countries will face some negative news between June 12 and July 13.

García hopes to enjoy watching the games, but he is making all of his important financial decisions before June 13 (Spain vs. Netherlands, 3 p.m. EST).

García’s research interests include informational economics, financial media, behavioral finance and financial intermediation. He teaches courses on derivatives and derivative securities. Read more about his research in the fall issue of R.O.I., the research magazine of UNC Kenan-Flagler, and on his web page.