Germany 7-1 Brazil: A Political Shock

Abstract

We study the effect of a huge sports sentiment shock, unrelated to economic conditions or government actions, on stock market outcomes. After Brazil's 7-1 humiliating defeat to Germany in the 2014 World Cup, which is likely to be one of the largest sports sentiment shocks ever, the stock market went up. We provide evidence of two opposing effects on stock prices. One is the usual negative effect due to the investor sentiment channel documented in the literature. This effect was, however, overwhelmed by the arguably rational response of investors to voters' sentiment. In particular, the 7-1 defeat was perceived by stock market participants as a political shock affecting the upcoming close presidential election. To decompose these two effects, we devise an empirical strategy that allows us to compute the component of daily returns associated with political news.