The Euro 2020 final moved stock prices because sport makes us irrational investors

The Italian stock market rose last Monday while the UK stock market fell. Italy’s FTSE MIB index rose 0.92% on the day, while the FTSE UK All-Share Index started down 0.65%. Is it a coincidence that these returns mirror the outcome of the European Championship final, in which Italy beat England on penalties?

Perhaps not. Researchers have found that, as a general rule, a country’s stock market suffers whenever one of its sports teams is eliminated from major world competitions.

Perhaps the best known study on this topic appeared in the August 2007 issue of the Journal of Finance. The study, Sports Sentiment and Stock Returns, was conducted by finance professors Alex Edmans of the London Business School, Diego Garcia of the University of Colorado Boulder, and Øyvind Norli of the Norwegian School of Management.

After analysing stock-market reaction to more than 2,000 international sporting events back to 1980, the researchers found that, on average, a given country’s elimination from global competitions was followed by its stock market producing a return that was significantly below average in the immediately subsequent trading session.

Interestingly, the researchers found no corresponding above-average return to a country’s stock market following one of its sports teams’ wins in international competitions. They speculate that this asymmetry traces to a tendency for losing teams’ fans to become more downcast than for winning teams’ fans to become upbeat.

READ England to Kane Italy in Euro 2020 final, Goldman analysts predict

One implication of this asymmetry is that the world equity market will have below-average returns during global sports competitions — during times in which some countries will be eliminated, in other words.

Supporting evidence is found in another study, Exploitable Predictable Irrationality: The FIFA World Cup Effect on the US Stock Market, by Guy Kaplanski of Bar-Ilan University and Haim Levy of the Hebrew University of Jerusalem.

I note that this implication held true during the previous World Cup, which occurred in July 2018. Over the course of that two-week competition, the Vanguard Total World Stock ETF lost 0.9%.

This discussion naturally leads to focusing on the upcoming Tokyo Olympics, which kick off on 23 July. In an email, Edmans cautioned against extending his research to this competition. That’s because ’‘ for example. Sure enough, during the previous Olympics, which occurred in August 2016, the Vanguard Total World Stock ETF gained 1.9%.

The investment implication I draw from this body of research? Don’t look for the global stock market to perform better or worse than normal during the upcoming Olympics. That doesn’t mean the market won’t. It just means that if it does, you shouldn’t attribute this result to the Olympics.

There’s a broader investment implication as well — the surprisingly large role our moods play in our investment decisions. We like to think of ourselves as rational investors who approach the markets in a statistically rigorous fashion. These studies of sports sentiment and stock returns show how mistaken we can be.

READ If you ‘sell in May’, stick around for the summer

As further evidence of how our moods affect our investing, Edmans referred me to a paper he and three colleagues just completed — Music Sentiment and Stock Returns Around the World — co-authored with Adrian Fernandez-Perez and Ivan Indriawan of the Auckland University of Technology and Alexandre Garel of the Audencia Business School. The study is forthcoming in the Journal of Financial Economics.

The researchers were given access to Spotify Technology data showing, for each country and each day, the top 200 songs as ranked by the total number of streams. The researchers also had access to the results of a Spotify algorithm that rated each song according to its “valence or positivity”. They found that “music sentiment is positively correlated with same-week equity market returns” in 40 different countries analysed.

In other words, listening to upbeat songs can help boost stocks while sadder songs bring the market down.

The researchers are not suggesting that we trade the markets according to which songs are most popular. Rather, their point is to show the importance of immunising ourselves from the powerful role our moods can otherwise play in our investment decisions.

Perhaps one of the best ways of doing that is to check with a colleague or associate whenever you are about to make a change to your portfolio. Make sure it is someone who is not currently experiencing your own sense of exuberance or despondency. You receive a powerful reality check on your emotions from the simple exercise of having to justify your decision to someone else and receiving their feedback.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited.

This article was published by MarketWatch

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