Testing the Super Bowl Theory - Essay Example

Testing the Super Bowl Theory Introduction In the event that a certain phenomenon such as the increase in value of stocks after a sports’ game has been won or lost, is outrageous provided that there are no direct connections between the stock market and the sporting industry. However, considering a rather practical example in the case tossing a coin expecting other tails or heads at 50-50 rates may be confusing if the coin toss results to heads or tails ten times in a row. With reference to the stock market, the coin toss example features in this case as there have been instances, 29 times in 36 years where the NFC (National Football Conference) has affected the returns on the stock market. Despite the obvious lack of connection between the two entities, stock market and the NFC, it has been shown that stocks have somehow traded within the expectations of the investors and analysts. Supporters of the Super Bowl Theory argue that if an original team or player of the NFC wins a match, they the stick prices tend to go up thus reflecting reasonable investment environment. In this case, Super Bowl Theory is t be tested of whether is really works under any certain circumstances or it only works because the Super Bowl is usually held during favorable times for the stock market. In this event study, analysis on the trends for the last 20 years is considered to predict how the Super Bowl and the stock market relate. If there are any specific relations or associations between Super Bowl and stock market would be tested with regards to the Wall Street saying that once January is gone, and so is the year. The saying that January and the rest of the year are connected produces the same effect as arguing that the Super Bowl has direct influence on stocks. Additionally, there are special occurrences that require much robust analysis as these cannot be assumed to have worked or failed to work because a nation or worldwide event took place. For instance, back in 2008, the financial market experience the Recession which affected almost all sectors but a few. Considering both the Super Bowl Theory and the ‘January…’ saying, the effects of the Recession could not be predicted or even justified by the theory. However, prejudgment on this issue can be attached to the sponsorship of the NFL. As an assumption, when the stock market is stable or expected to elicit some stability and improvement in the future, sponsors are more likely to pump funds into the Super Bowl event thus motivating the original NFC teams and players. Under this circumstance, it can be concluded that the Super Bowl has nothing to do with stock value but sponsors and organizers of the event influence he win by promising players and teams higher compensations for the win given that the amount of information at the sponsors’ disposal predicts brighter future. This analysis considers these options as well as ripple effects of previous stock market trends. This event study aims at establishing that the Super Bowl Theory is or is not a ‘lucky’ shot at the stock market aimed at convincing investors that out of the many times Super Bowl has been won by NFC and not AFC, investment is appropriate as returns would be reflecting this prediction. Data Description Super Bowl Year % stock change maximum return change NFC wins Theory Correct? Year 1994 -1.54 1.32 confirmed No Year 1995 34.11 37.58 confirmed yes Year 1996 20.26 22.96 confirmed yes Year 1997 31.01 33.36 confirmed yes Year 1998 26.67 28.58 no win No Year 1999 19.53 21.04 no win No Year 2000 -10.14 -9.1 confirmed No Year 2001 -13.04 -11.89 confirmed yes Year 2002 -23.37 -22.1 confirmed No Year 2003 26.38 28.69 confirmed yes Year 2004 8.99 8.99 confirmed yes Year 2005 3 4.91 confirmed yes Year 2006 13.62 15.79 confirmed yes Year 2007 3.53 5.49 no win No Year 2008 -38.49 -37 no win No Year 2009 23.45 26.46 confirmed yes Year 2010 12.78 15.06 no win No Year 2011 -0.003 2.11 confirmed yes Year 2012 13.41 16 confirmed yes Year 2013 29.6 32.39 confirmed yes Year 2014 -3.56 -3.46 no win No Table 1: Super Bowl wins and fails against stock changes (Silverblatt, 1) According to the Silverblatt (1), the Super Bowl has been played 20 times since 20 years ago as the league is played once every year. In this case, data is collected for the 20 years showing the number of times the league has been won by a NFC team. The data classifies the wins and fails against the stock changes to indicate whether a win translated to stock change for a positive or a negative. From this data, the wins are confirmed as well as the stock returns. However, data is on the number of wins a NFC team has won is compared with the specific change that has been identified in the stock market. These changes in stock market are compared with the outcome of the league thus translating to either the theory is right or wrong for each outcome. Other considerations include the percent change of stock returns year-on-year. Thus, in order to consider whether the theory holds for or against the wins and fails, the raw data is processed using MS Excel 2013. Empirical Test The data is analyzed through the use of MS Excel 2013 and presented in graphical form to showcase how the Super Bowl wins and fails are related to the stock market changes and how the ‘January saying’ applies in each case throughout the 20 years of data collection. Return on stock is presented for each year to show whether there is any trend that can be identified between the wins and the return changes. Provided that the data in this case is collected from a time series, a trendline is created to show whether the wins or the change in returns had a specific trend that may have opposed the theoretical underpinning that a win a positive stock change were related. The Super Bowl Theory indicates that a win for the NFC translates to an up year for securities while a win by the AFC is an indicator of negative returns on stocks. Out of 36 times the Super Bowl has taken place, 29 have confirmed that the theory held grounds and surpassed the 80% accuracy rate that it is believed to hold. Robert Stovall, a long time Wall Street stock broker explains that the Super Bowl theory works better than the market professionals are able to predict using other approaches. As a forecasting method which suggest that a win from the NFC is bullish while AFC’s win is bearish. Relating to past experiences within the NFC and AFC league wins, it was identified that around the 1970s the indicator failed four times in a row indicating showing that the theory was either conditioned or had other variables in play. In 1974, the New England Patriots emerged victorious after they beat NFC’s St. Louis Rams as well as the Miami Dolphin’s win over NFC’s Minnesota Vikings. During the wins by AFC teams in the Super Bowl, Dow Jones suffered the worst financial year. With reference to games played prior to 1990s such as the wins that were bagged by the Raiders indicated that the wins had a tremendous negative effect on the Dow Jones stocks since the Raiders belonged to AFC. These wins were achieved in 1977, 1981 and 84. However, with this in record the years in which Dow Jones indicated that the market was up, raiders had lost in the Super Bowl such as the occurrences of 1968. Taking into consideration that correlation does not translate to causation, the data in this case is analyzed with the 80% accuracy level set as the benchmark so as to reinstate or disqualify the Super Ball theory as a reliable market indicator in today’s stock market. While Super Bowl outcomes may have a correlation with stock market or equity, this analysis would like to take into consideration whether an individual can construct portfolio based on the theory. Considering that the stocks traded from the year 1994 to the year 2014, it shows that the number of times that the stock prices fell affected the change in stability and trading within the market. From graph 1 above, the stock changes are regular and portraying a high degree of irregularity that also coincides with the number of times the Super Bowl was either won or lost by a NFC team. However, the maximum or total change in return indicates the change regarding the previous stock market prices under each case. The presented data shows that the change in stock return and the total change in stock return have minor differences over the 20 years considered. However, from the data presented in this case, considering the saying that, “as goes January, so goes the year” evidence can be pulled together that Super Bowl sets the trend in stocks. However, this hypothesis coincides with the fact that Super Bowl is normally held in January or sometimes towards the break of the New Year. With this in consideration, it can be deduced that January being only one month out of twelve in a year has been considered a factor in determining whether stock market would be either growing or shrinking. According to S&P and Dow Jones Indices analysis, Silverblatt (1) argues that the January hypothesis has been right 62 times out of 85 years that have been considered in an analytical research aimed at providing insight into the hypothesis. However, considering the current data and specifically graphical presentation in graph 2, the number of times Super Bowl was won by a NFC is 14 times out of 20 times. This shows that the 62 times out of the 85 years of observation is higher, 72.941%, than the 14 times out of 20, 70%, the Super Bowl has been won by NFC. With regards to the 80% accuracy rate that the Super Bowl Theory is claimed to hold, has not been achieved by neither considering the current 20 years of Super Bowl leagues nor the January hypothesis observed for 85 years. Table 2: NFC wins vs. validity of Super Bowl Theory. The Super Bowl theory has been voted as the best method for predicting stock market dynamics and stability of the market. Considering the six times that the theory has failed within the 20 times refutes the 80% accuracy level and also provokes the need to test the method using other leagues rather than the Super League. Under the current data analysis and the results in this case, Super Bowl Theory is a method that only provides an abstract prediction of the stock market but does not have a formula nor does it have a variable that it tests besides assumptions. For instance, if the Denver Broncos were to draw with the Seattle Seahawks five minutes to the end of the official time of the NFL, this means that the stock market would be hanging in the balance as investors wait for a positive touch down by the Broncos who belong to the NFC. Assuming this was the case, and a NFC player was fouled towards a potential touchdown, then the stock market would be dependent on the taker of the resulting ‘free kick’. The entire scenario that the stock market for the rest of a financial year would be dependent on whether the ‘free kick’ would result to a score elicits deficits on the Super Bowl Theory. The ‘January hypothesis’ also projects some major limitations in relying on a ‘80%’ accurate theory in the construction of a portfolio. Works Cited Silverblatt, Howard. Will the Super Bowl Theory hold up this time? Retrieved online on June 4, 2014 from http://www.indexologyblog.com/2014/01/31/will-the-super-bowl-theory-hold-up-this-time Read More