Impact of football on the financial markets
Football! The most loved sport in the world has been on the rolls once again!
EURO 2016 kicked off in France with major expectations from home country, but the activity of football and the carnival of joy, thrill, excitement also has impact on the financial markets, which has consequence not only in Europe but also around the globe.
To get a sense of just how vital football is to the fabric of European society, the European Central Bank (ECB) has conducted research on the impact of major sporting tournaments on the financial markets. ECB researchers focused specifically on the World Cup. Their hypothesis was that the tournament distracts traders, which could lead to some unusually volatile market swings.
The ECB researchers clearly showed that trading volumes dropped significantly if traders’ own country was playing. In Chile, for example, trading plunged a staggering 99.5% during national team matches. By comparison, volumes fell 79% when teams other than Chile played. During the Football World Cup in 2010, the number of trades made when the national team was playing fell by 45 per cent, according to an ECB study of 15 international stock exchanges. An additional 5 per cent drop in trading activity was recorded when a goal was scored. Due to football, traders tend to remain distracted, which lead to overall low trading volumes leading to unusual market conditions during major football tournaments. Any attempt to master the market’s trading psychology during this distressful period will likely be in vain.
One study looked at the trading patterns of semiconductor giant STMicroelectronics, which is traded on exchanges in both Italy and France. While the company’s market capitalization is normally identical on both exchanges, the stock fell on the French exchange when France lost to South Africa in its final group stage match. No such movement happened in Italy. On the flipside, the stock’s price fell in Italy when the Italian football team lost against Slovakia just two days later. Trading fell 38 per cent in European countries and 43 per cent in the US, but it was in football-mad South America where the biggest effect was seen. Trading fell by 75 per cent in Brazil when its national team was playing and by 79 per cent in Argentina. In Chile, trading almost stopped, falling an incredible 99 per cent during matches involving the national team.
Traders might profit by predicting who will lose in individual games and then betting against that country’s market, but it is not easy to make accurate predictions. In contrast, betting against US markets offers a “free lunch” to traders as it doesn’t depend on the games’ results, with the effect increasing as the month-long tournament progresses.
With viewing data showing that the US’s first game at this World Cup was watched by more people on TV than the final round of the US Open Golf, the final game of ice hockey’s Stanley Cup and even the concluding game of the NBA finals, it will be interesting to see if the effect is exacerbated in the US in their upcoming baseball games as well.
Now, that Germany has defeated Italy in Eurocup 2016 quarter finals after waiting for many years, we believe that DAX (German stock market index) should rise when the markets open on monday.
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