It's coming home. Football that is. Tonight England face Croatia for a place in the World Cup Final. If England lose tonight what will happen the stock market tomorrow? A paper by Alex Edmans and co-authors find that markets decline after football losses. For example, they find that a loss in the World Cup elimination stage leads to a next-day abnormal stock return of -49 basis points. Why? The idea is simple. Stock prices are driven by things like mood and sentiment. A loss by a national football team has a negative impact on national mood and affects the trades made by investors the next day. England lost on penalties to Germany on 4th July 1990. The FT30 index fell by 1.2% on 5th July. I feel a new World Cup song coming on - 'Football hurts your portfolio'!
As an undergraduate, I was taught about the failure of Herstatt Bank in 1974 and Herstatt risk. This bank was only the 35th largest bank in Germany at the time so why would anyone be interested in studying its failure? Herstatt failed because of its involvement in risky foreign exchange business. When it closed its doors on 26 June 1974, counterparty banks (mainly in New York) had not received dollars due to them because of time-zone differences - this is known as settlement risk. The cross-jurisdictional implications of its failure resulted in the Bank for International Settlements setting up the Basel Committee on Banking Supervision and Herstatt's failure was a key reason for the establishment of real-time gross settlements systems, which ensures that payments between two banks are executed in real time.
The Bank of England's Ben Norman has an interesting post on Herstatt over at the Bank's new blog (Bank Underground). As well as giving an excellent overview of the Her…
The Bank of England's Ben Norman has an interesting post on Herstatt over at the Bank's new blog (Bank Underground). As well as giving an excellent overview of the Her…