10 Jun 2016
Early elimination for England from the Euros 2016 could wipe £6 billion off the stock market in a single day, a finance expert from London Business School has warned.
Alex Edmans, Professor of Finance, London Business School, says the effect of football results on national mood is so strong that it can spill over into the stock market and cause swings of billions of pounds.
“My research shows that a loss in a major football competition can have a profoundly negative effect on investor mood. Share prices are affected not only by fundamentals, but also by emotions. Sports have huge effects on people’s emotions”, Edmans explains.
Edmans and his co-authors, from the University of Colorado and BI Norwegian Business School, investigated the link between 1,100 international football matches and stock returns in 39 countries in the paper Sports Sentiment and Stock Returns. The results were striking. Being eliminated from a regional tournament, such as the Euros, leads to the national market falling by 0.3 per cent the next day.
“When applied to the UK stock market, this translates into a single-day loss of £6 billion”, says Edmans.
On the contrary, Edmans and his co-authors found no effect of a win in any sport.
“One reason could be that sports fans are notoriously over-optimistic about their team’s prospects. If fans go into each game expecting they’ll win, there’s little effect if they do win, but they become depressed if they lose. Another is the asymmetry of the competition: winning an elimination game merely sends you into the next round, but losing leads to instant exit.”