Cricket is considered as a religion in Indian sub-continent and people are crazy about Cricket, especially in this part of the world. With ICC Cricket World Cup 2011 being played in the year 2011, the game would rise to new levels. If you are a Cricket fan closely following the ICC Cricket World Cup 2011 matches, and watching the stock market simultaneously, then it’s time to do some investigation into the relationship between this sporting mega-event and stock markets.
The impact of sporting events on stock prices have already been captured in several recent research studies. A finding in these studies shows that stock prices react sharply to team performance in big sporting events, and when it comes to an event like the Cricket World Cup, the impact would be certainly significant, for sure. Many argue that a sporting event is a non-economic phenomenon and, as such, stock price will not be affected. However, behavioral finance theorists suggest that large sporting events affect the sentiments of viewers (who are/might be simultaneously investors) resulting in upwards or downwards “mood swings” in the stock market, which are subsequently reflected in stock prices.
The basic conceptual framework in such studies involving the impact of mood swings on stock prices draws on the psychology literature which integrates economics, finance, and psychology to assess the impact of mood fluctuations on the decision making process. The pioneers of this line of research in behavioral economics and behavioral finance use the term neuroeconomics to refer to the science of using brain activity to infer investor decision making processes, and subsequently using this concept to explain stock market systems. As far as the relationships between sporting events and stock prices are concerned, the economic research in this field is relatively new. Ashton and Gerrard (2003) studied the impact of the performance of the English soccer team on the FTSE 100 index based on all matches played by the team during January 1984 to July 2002 and found that good performances by the national soccer team was followed by good performances in market returns. This phenomenon is attributed to two issues: either there may be a feel-good factor with national sporting success engendering greater confidence about the future, and/or given the increasing commercial importance of international tournament finals, an efficient stock market is expected to revise the potential economic benefits to be derived from the favorable results of national soccer team.
Edmans and Garcia (2007) examined the effect of cricket matches and their outcomes on stock market sentiment as part of a broader study considering the outcome of a range of sporting events on stock markets in several countries. The magnitude of the loss effect, and its concentration in Western European countries with developed stock markets, suggests that investors may obtain large excess returns by trading on these mood events, for instance, by shorting futures on both countries’ indices before an important match to exploit the asymmetry of the effect. However, the events we cover do not occur with enough frequency to justify a portfolio fully dedicated to trading on them. Moreover, because the effect seems to be particularly strong in small stocks and involves shorting, even traders who face low transaction costs would find it challenging to take advantage of the price drop. Our principal contribution is not to identify a profitable trading strategy, however, but to document that mood can have a large effect on stock returns. In light of our findings, this paper significantly expands the existing evidence linking mood to asset prices.
Taking this issue further (and in the context of the title of this write-up), Mishra and Smith (2010) examined the impact of India’s performance in one-day cricket international matches on the Indian stock market and found an asymmetric relationship between the performance of the Indian cricket team and stock returns on the Indian stock market. While a win by the Indian cricket team has no statistically significant upward impact on stock market returns, a loss in cricket match generates a significant downward movement in the India stock market. They also found that when Sachin Tendulker (one of the India’s, rather World’s most popular cricketer) plays, the size of the downward movements in returns is higher.
Well, let’s now check if the performances of the Indian cricket team in the ongoing ICC Cricket World Cup 2011 matches have any (significant) impact on stock returns in Indian stock markets. The above graph shows the movements of stock returns of two major indices in the Indian stock market, namely the Sensex (the Sensitive Index of the Bombay Stock Exchange, BSE) and the S&P Nifty (the 30 stock index of the National Stock Exchange, NSE). In order to analyse the impact of the Indian team performances on the stock returns, I drew the schedule and results from here. When you see the return movements in the above graph, you notice that on 21st February, 2011 (Monday) [immediately after the Indian cricket team won its first match of this tournament against Bangaldesh held on 19th feb. 2011, Saturday in Dhaka], returns shook up swiftly from negative (-1.60%) to positive (about 1.20%) in both the Sensex and the Nifty. After the second match with England played in Bangalore on 27th Feb. 2011 (Sunday), the market reacted somewhat neutrally or even downwards in case of the Nifty. If you remember the outcome of that match, it was tied between India and England. Here again, the outcomes support the hypothesis that results of a major sporting event affects stock returns in short term. This phenomenon is evident from the outcomes of the matches the Indian cricket team played and won on the 9th, 20th and 24th of March, 2011, when stock returns reacted positively to the winning results of the domestic team. The returns on the next days of the matches won by the Indian team have been upwards in all these cases, the strongest reaction of all was seen on 25th March 2011 match (after the day when Indian team played against Australia, and won awfully and Indian team entering the semi-finals of the ICC Cricket World Cup 2011). The stock returns on that day in the Sensex and the Nifty both was about 2.5%. It is interesting to note that the Australian team was knocked out of the Cricket world cup tournament after three successive victory, and also that in the Semi-finals, India is going to play a mouth-watering match with its war-like competitor Pakistan after a long time. The cricket match between these two nations have always been much much more than just a cricket match.
Although the stock returns send positive signals after most of the favourable outcomes of the Indian cricket team in this tournaments, we cannot ignore the fact that the stock returns did not behave in a way it did after most of matches the Indian cricket team won in this mega event. After a match on 12th March 2011 when South African team won a match against India, the stock returns show upward movements next day. Similarly, the stock returns on days after some of the matches show a trend contradictory to the above-mentioned hypothesis [see return movements on 10th March 2011: India vs. Netherlands (09-03-2011, Delhi); and 14th March 2011: India vs. South Africa (12-03-2011, Nagpur)].
So, what can be said about the relationship between financial nerves and sporting blood of the country? Since the above discussion is not based on any statistical or economic analysis, nothing as such a concrete association between the stock returns and cricket match outcomes is found. I have just tried to observe a possible relationship between these two things, on the basis of a simple tracking of the results of cricket matches played by Indian team in the current Cricket world cup and the return movements in Indian stock indices during that period. Research involving more solid and analytical approach and sophisticated econometric techniques is required to establish any meaningful relationship between stock returns and Indian cricket team performances. Till the time, enjoy the ongoing ICC Cricket World Cup 2011!!