In less than 24 hours, the opening ceremony to one of the world’s greatest international events, the World Cup, will kick off. Since its establishment in 1930, the tournament has been held every four years (barring the WWII hiatus in 1942 and 1946), and according to tournament sponsor FIFA, over 700 million people, or about 10% of the world’s population, watched the final match of the 2012 tournament in South Africa. While we would gladly spend hours analyzing the prospects for each of the 32 teams in the tournament, we’ll limit today’s discussion to our area of expertise, trading.
As we last noted around 2012 Sochi Olympics, major international sporting events tend to have an impact on the host country’s currency. On this occasion though, the Brazilian real (BRL) is not particularly liquid or widely traded. However, past World Cups have had a large impact on trading volume and volatility in other markets.
A study conducted by the ECB in the wake of the most recent World Cup found persistent declines in local stock market volume when a country’s team was playing, especially in Latin American countries. The study found that stock market volume dropped by an average of 55% during the home country’s game, and volume in Chile’s stock market fell by an incredible 99% when “La Roja” was playing! Even the in the US, arguably the least ‘soccer’-crazed nation in tournament, trading volume declined by over 40% during US matches.
While we can’t bring to bear the breadth of resources that the ECB has at its disposal, we can still identify a similar effect in the forex market over the last few World Cups. The chart below shows the 1-month implied option volatility (a measure of how much movement the market expects to see over the next month) on both the EURUSD and USDJPY:
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