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Trust and stock market correlation: a cross-country analysis

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  • Liu, Yuna

    (Department of Economics, Umeå University)

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.

Suggested Citation

  • Liu, Yuna, 2016. "Trust and stock market correlation: a cross-country analysis," Umeå Economic Studies 924, Umeå University, Department of Economics.
    • Handle: RePEc:hhs:umnees:0924
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    References listed on IDEAS

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    More about this item

    Keywords

    International Financial Markets; Stock Market Correlation; Trust; Volatility; Portfolio Diversification; Stock Market Participation;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • F15 - International Economics - - Trade - - - Economic Integration
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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