Researchers Find World Cup Triggers Stock Market Response

Like other stock markets around the world, the German stock market -- the DAX -- has suffered dramatically in recent weeks. According to Commerzbank's stock market trend report for last week, the primary reason for German investor insecurity is fear of inflation and interest rate changes.

All the more surprising, then, Commerzbank said, that the DAX climbed 2.5 percent mid-week. While the bank's experts believe the market will remain volatile for a while, some observers cannot help but wonder whether or not Germany's just-in-the-nick-of-time 1-0 win against Poland on Wednesday night helped to spur on the DAX.

With national spirits high and many enthusiasts believing Germany will make it at least to the World Cup semi-finals, it is not far-fetched to believe that people are more likely to invest their money in German stock.

"The stock market is all about psychology"

A spokesman for Pro-Aktionär, a society for small investors, said that "when you look at Thursday's market results, you would really believe the World Cup is definitely having an effect on returns." "The sense of community and all the friendly people -- that just has to spill off and help the markets recover."

"But actually, one thing does not have to do with other," he added. "A German victory win may improve the general mood on the market a bit -- after all, the stock market has a lot to do with psychology -- but the World Cup does not affect it concretely," he said.

But other analysts disagree. Malte Heyne of the University of Bremen and Bernd Süssmuth of the Technical University of Munich have shown there is a direct correlation between the performance of the German soccer team and the DAX.

Losses or draws mean bad news for German returns

"There is an effect, but it is an asymmetric one," Süssmuth said. "We found that when the German soccer team wins, it does not affect the market. A loss or a draw, however, has a negative effect."

Although one might think a victory would motivate German investors, Süssmuth says it is the element of surprise that causes a market reaction.

"Germans always expect their team to win," he said. "It's only when those expectations are not fulfilled that people -- and investors -- respond, and do so negatively. That element of surprise only comes about in a loss or a draw."

Süssmuth and Heyne compared the results of 490 qualification and tournament games the German national soccer team played between 1959 and 2004 with corresponding German stock returns. They found that on the next trading day after a tied game, stock saw an average 0.22 percent loss. A match defeat resulted in a 0.88 percent drop. The researchers found "no significant reaction" after a match victory.

When winning means losing for Germans

However, in some cases, a German soccer win has even meant a loss on the DAX. While Süssmuth and Heyne warned that results for victory responses on the market were not entirely conclusive, they found that on the trading day after Germany's World Cup victory against the Netherlands in 1974, the DAX dropped almost one percent. A somewhat similar reaction occurred on the DAX in 1990 following the German win against Argentina.

It works differently in England. Süssmuth said that researchers there have shown that football matches affect the London stock market -- the FTSE -- symmetrically, meaning that not just draws and losses, but also wins cause a market reaction. Among the English, however, draws and wins have a clearly positive effect.

Another research team has taken analyzing sports and the stock market one step further. In a forthcoming Journal of Finance report called "Sports Sentiment and Stock Returns," Alex Edmans, Diego García and Oyvind Norli document correlations between the outcomes of 1,100 games during international and continental tournaments and corresponding stock returns. Their study focused on 39 different countries and a variety of sports, with a focus on soccer.

Edmans and his team have likewise found a significant market decline after soccer losses, but like Heyne and Süssmuth, have not been able to demonstrate a clearly positive trend following victories.

The heat is on the German team

For the World Cup now underway in Germany, Süssmuth said the results are not in on how it is affecting the German market. "Interest rate changes have a much clearer effect on the stock market," he said. "As far as the World Cup goes, we just have to wait until it's over before we can isolate the results."

The pressure is on the German team, then, to keep up its winning streak -- and not only so they can hold up the World Cup trophy at the tournament's end. Based on Süssmuth's and Heyne's findings about game loss and stock returns, a Cup defeat -- the Süddeutsche Zeitung newspaper calculates -- would currently translate into an over one-billion-euro ($1.26 billion) loss of market value the following day.