Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 924: Trust and stock market correlation: a cross-country analysis

Yuna Liu ()
Additional contact information
Yuna Liu: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden

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

JEL-codes: D31; F15; G11; G15

29 pages, March 16, 2016

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