Umeň Economic Studies, Department of Economics, Umeň University
Trust and stock market correlation: a cross-country analysis
Abstract: Several studies have shown that the level of trust between
agents is an important determinant of financial decisions. This paper
studies this issue further by analyzing whether the measured level of trust
in different countries can explain bilateral stock market correlations.
Using a panel of 62 countries and 1891 country-pairs over a period of ten
years, the effect of generalized trust on stock market correlations is
analyzed. One finding is that generalized trust among nations is a robust
predictor for stock market correlation. Another is that the trust effect is
larger for countries which are close to each other which indicates that
distance mitigates the trust effect. Finally, we confirm the effect of
trust upon stock market correlations, by using particular trust data
(bilateral trust between country A and country B) as an alternative
measurement of trust.
Keywords: International Financial Markets; Stock Market Correlation; Trust; Volatility; Portfolio Diversification; Stock Market Participation; (follow links to similar papers)
JEL-Codes: D31; F15; G11; G15; (follow links to similar papers)
29 pages, March 16, 2016
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