Sunday, June 13, 2010

The World Cup Effect On The Malaysia Stock Market

Dear readers, sorry if I did not post as frequent as I should be. Sorry too if my posting quality drop throughout this world cup season. Your turtle is suffering lack of sleep.

(FundSupermart)Soccer is the most popular sport in the world, with the 2006 FIFA World Cup commanding a cumulative (with duplicates) global TV audience of 26.2 billion, with 376 channels showing the event and a total of 43,600 broadcasts across 214 territories according to FIFA’s marketing figures.

By virtue of the population outreach and exposure to psychological factors, it wouldn’t be a big stretch to assume that the World Cup, soccer’s biggest sporting event, would cause short term fluctuations in stock markets. In fact, there is ample evidence to show that international soccer results have an asymmetric affect on stock markets; losses have a significant negative effect in the losing countries’ local markets, whereas victories do not have a significant effect.


Regardless of winning and losing, a research paper by Kaplanski and Levy on the spill over effect of the World Cup on the US stock market showed that from 1950 to 2007, the average return on the US market over the World Cup’s effect days is −2.58%, compared to +1.21% for all days over the same period length. The conclusion reached was that the World Cup has an adverse impact on the US stock market and that this gives rise to an exploitable predictable irrationality during the event.

This brings us to the purpose of this article. We intend to use a more simplified testing methodology and apply it to the Malaysia stock market, as represented by the FTSE Bursa Malaysia KLCI to see whether the World Cup also has an adverse effect on the Malaysia stock market.


Due to Malaysia’s time zone in relation to World Cup host countries, we take the closing price of the trading day preceding the game day as the buy-in point. The sell-off point would be the closing price of the game day itself, or the trading day subsequent to the game day if it falls on a holiday.

We will cover the past 4 World Cups and compare between the average daily returns of three different investment strategies; investing only on game days, staying invested for the duration of the World Cup (i.e., from the first game till the last game including the break days between matches) , and staying invested for the whole year.

Before we move on to the results, it is useful to know that we have found nothing to suggest any June – July seasonal effect when looking at data from the past 16 years. Excluding World Cups years, the number of June – July periods where the average returns were higher than the corresponding calendar years' was 6, while the number of June – July periods with lower average returns was also 6. As such, the differences between the average daily returns in the table below are mostly likely attributed to the World Cup.


As the above charts shows, investing only on game days is consistently worse off than staying invested for the duration of the World Cup, which in turn is worse than staying invested for the whole year. For example, during previous World Cup in 2006, investing in game days gave a 0.02% average return daily, while staying invested during the duration of the World Cup gave a 0.03% average return daily. In that calendar year, the KLCI advanced by 0.05% on average per day. In 1998, the KLCI advanced by 0.003% on average per day (too minuscule to appear on the graph), while the World Cup period gave average daily returns of -0.57% for game days and -0.54% for the whole duration of the event.


It is important to note that the macroeconomic backdrop would still be the key factor driving market performance and that our testing on the KLCI lacks the rigorous methodology of a bona-fide academic journal. However, the results show that the World Cup does have an adverse impact on the Malaysia stock market, and this phenomenon is also getting coverage in the local newspapers as the World Cup draws close. Although past performance does not guarantee future performance, the Kaplanski and Levy have found that, "the World Cup effect is large, highly significant, and long lasting."

1 comment:

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