On July 21, the International Olympic Committee recently awarded Brisbane, Australia, the 2032 Olympic Games. Since then, the ASX200—Standard & Poor’s benchmark index representing the 200 largest equities on the Australian Securities Exchange—has risen +3.29% (through the close on 8/2). NYU assistant professor Ted Hayduk suggested gains were to be expected. “Investors get pretty excited [when their country lands the Summer Olympics],” he said. “You tend to see a little bit of a bump [in the domestic markets] after host-city announcements.”
That, however, has not historically been the case when a city lands the Winter Games. “Most research has found no statistically significant jump at all,” Hayduk said, noting in some cases that there is as much as a 2-3% dip on announcements dating back to the ’88 Calgary Games. So the academic was surprised when his latest study in the Journal of Sports Economics showed the Korean Stock Exchange ballooned about $34.96 billion above predicted returns on the news PyeongChang had been awarded the 2018 Games (the market peaked 15 days after the announcement, though the effect wore off entirely after 25 days). Hadyuk suggested significant infrastructural needs, an overly exuberant investor base and some regional competencies likely drove the uncharacteristic market reaction.
Our Take: Many of the studies that have looked at stock markets reactions to the host city announcements were done to test theories related to market efficiency. “The idea is [to see if the] markets responded to the new information thrown out into the [ether],” Hayduk explained.
It is logical to wonder why a benchmark index, representing a subset of a given country’s stock market, would be impacted—positively or negatively—by the announcement of an event taking place in a single city. Hayduk explained that while each Olympics has a host city, “The entire nation gets to participate in the procurements. And firms headquartered across the country wind up being responsible for enhancing production and ramping up manufacturing.”
Much of the research conducted on host city announcements for recent Summer Games has been optimistic. “The Summer Olympics are larger,” Hayduk said. “There are more events and more nations competing. The venues are bigger because of the nature of the events. The athlete village that has to be built is larger [because there are more athletes]. There is a need to build more hotels. All of that stuff [costs money].” It makes sense that the anticipation of domestic spending would spawn investments in the stock market.
The more infrastructure needed to successfully host the Games, the more money will be spent—which explains why investors have historically been less excited about the Winter Olympiad.
PyeongChang certainly required more infrastructure development than, say, Salt Lake City (2002) or Vancouver (2010). But Hayduk doesn’t attribute the unexpected 3.8% spike solely to the city’s needs. “South Korea bid for and finished in second place for the two previous Winter Games (they also finished in third in 2006),” he said. “So, they had been trying to host one of these for the better part of 10 or 12 years. Folks that were trading in South Korea were hyper-attuned to the [IOC] announcement and [were] irrationally happy.”
It is not clear when the IOC intends to announce the host of the 2036 Summer Games. But Hayduk said, “If you are a day trader or a higher frequency trader, and you put your money in an index-wide vehicle [within the eventual host country], there are some gains to be had there for sure.”
Of course, there are greater gains available to aggressive investors prepared to invest at the industry or firm level. Hayduk found that in South Korea, the finance and IT sectors were disproportionately responsible for the abnormal returns (up 9-10% in the month following the announcement).
It is possible regional competencies may have pushed investors to disproportionately invest in South Korean finance and IT companies. “A lot of the top 300-500 firms trading on the [KRX] are in tech,” Hayuk said. “If traders know tech is at the forefront of everything [the country] does, perhaps they saw ways to deploy technology that would benefit the event and decided to devote their investment capital there.”
The consumer discretionary, hospitality and retail sectors also failed to pop on the news. Hayduk believes the timing of the announcement, six to seven years before the Opening Ceremony, explains why investors weren’t backing companies in those areas. It is logical to think all three sectors would have experienced increased investment interest in the weeks or months leading up to the event, though another study would be necessary to confirm.
It is worth mentioning that there is no correlation between the market capitalization increase post-Olympic announcement and the amount of money expected to be spent on the Games. “Remember, these [bumps seen in recent Summer Olympics and in Pyeongchang] weren’t long-term effects. The excess returns evaporated after 25 trading days as the exuberance dissipates,” Hayduk said.