Sunday, June 04, 2006

The World Cup

My foreign grad students recently alerted me to the fact that this is a World Cup year. The event appears to a focal point of their summer plans.

Although I am largely oblivious about spectator sports, I am intrigued by a report from Goldman Sachs "The World Cup and Economics: 2006." (Thank you, Daniel Drezner, for the pointer.) Goldman's figure on page 6 shows a strong correlation between World Cup ranking and GDP per person. Being rich and having a good team go hand in hand.

This raises a couple questions:

1. A few years ago, a study of Olympic outcomes found that total GDP, rather than GDP per person, was the better predictor of number of medals won. Shouldn't a similar result hold for the World Cup as well?

2. If economic prosperity leads to World Cup success, shouldn't this fact be enough to get more Europeans to vote for pro-growth economic policies?

Update: The causal link between the economy and sports seems to run both ways. A reader calls my attention to a paper forthcoming in the Journal of Finance, which shows that World Cup outcomes affect the stock market. Here is the abstract:

Sports Sentiment and Stock Returns
Alex Edmans, Diego Garcıa, and Øyvind Norli

This paper investigates the stock market reaction to sudden changes in investor mood. Motivated by psychological evidence of a strong link between soccer outcomes and mood, we use international soccer results as our primary mood variable. We find a significant market decline after soccer losses. For example, a loss in the World Cup elimination stage leads to a next-day abnormal stock return of −49 basis points. This loss effect is stronger in smallstocks and in more important games, and is robust to methodological changes. We also document a loss effect after international cricket, rugby, and basketball games.

Maybe I should be paying more attention to spectator sports after all.