Published in Insights, The New Zealand Initiative’s newsletter, 6 July 2012
Saving the euro from collapse must be a fulltime job for economists working at the European Central Bank (ECB) and its national member banks. At least so I thought. But then I stumbled across a fascinating ECB working paper co-authored by an ECB economist and a Dutch central banker. Its title: The Pitch Rather than the Pit: Investor Inattention During FIFA World Cup Matches.
The authors, Michael Ehrmann and David-Jan Jansen, deliver a path-breaking study. By analysing stock market trading during the matches at the 2010 soccer World Cup in South Africa, they show stockbrokers are human beings too; that soccer may well be the most important triviality in the world; and that central bankers obviously need distraction from their core business of delivering price stability.
What the two central bank economists did was as straightforward as it was ingenious. They delved into minute-by-minute trading data from nine European stock exchanges, four South American bourses, and one each from North America and Africa – and found results that challenged the prejudice that financial markets are inhabited by rational, information processing automatons prowling for a good deal. They may be most of the time – but not when their national team is playing.
During World Cup matches in which the national team was involved, the number of trades dropped by 45 per cent and trade volumes went down by 55 per cent. It was not just the match that mattered but also the result. When goals were scored, market activity dropped by another 5 per cent.
Even more interestingly, for the duration of the soccer matches, national markets even briefly decoupled from global stock market trends. Little wonder: Who cares about the latest movements of the Dow Jones when you can watch Ronaldo’s Portugal demolish North Korea by seven goals to nil?
Unfortunately, the working paper remains silent on policy implications. This is where the ECB perspective could have been useful. Maybe these lessons are already being applied? Or was it purely coincidental that the latest euro rescue summit was held on the night of the European Championship’s semi-final between Italy and Germany?
By better synchronising important sports events with the publication of relevant market data or new policy announcements, it seems many a stock market meltdown could be averted.
We are now awaiting research by our own Reserve Bank to shed light on the question whether rugby has a similar effect on the ups and downs at the NZX. Or are kiwi stockbrokers more rational than their soccer obsessed international colleagues?