It's coming home. Football that is. Tonight England face Croatia for a place in the World Cup Final. If England lose tonight what will happen the stock market tomorrow? A paper by Alex Edmans and co-authors find that markets decline after football losses. For example, they find that a loss in the World Cup elimination stage leads to a next-day abnormal stock return of -49 basis points. Why? The idea is simple. Stock prices are driven by things like mood and sentiment. A loss by a national football team has a negative impact on national mood and affects the trades made by investors the next day. England lost on penalties to Germany on 4th July 1990. The FT30 index fell by 1.2% on 5th July. I feel a new World Cup song coming on - 'Football hurts your portfolio'!
My colleague and former PhD student Gareth Campbell has created a website about the British Railway Mania - click here . This episode has been described by the Economist as probably the greatest bubble in human history. Gareth's website provides background on the Mania and posits some explanations for the 'bubble'. In his explanation of why the bubble happened, Gareth places a lot of emphasis on investor myopia regarding future dividends and uncalled capital. His study of investors during the episode does not support the view that this episode was fuelled by naive and irrational investors.