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Sentiment, Electoral Uncertainty and Stock Returns

52 Pages Posted: 11 Mar 2017 Last revised: 19 Aug 2017

Carlos Carvalho

Central Bank of Brazil; Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

Ruy Ribeiro

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

Eduardo Zilberman

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics

Date Written: August 1, 2017

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.

Keywords: sentiment; stock returns; electoral uncertainty; event study; soccer

JEL Classification: G12, G14, G18, C58, D72

Suggested Citation

Carvalho, Carlos and Ribeiro, Ruy and Zilberman, Eduardo, Sentiment, Electoral Uncertainty and Stock Returns (August 1, 2017). Available at SSRN: https://ssrn.com/abstract=2930564 or http://dx.doi.org/10.2139/ssrn.2930564

Carlos Carvalho

Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

HOME PAGE: http://https://sites.google.com/site/cvianac2/carloscarvalho

Ruy Ribeiro

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

Eduardo Zilberman (Contact Author)

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

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