The importance of trust distance on stock market correlation: Evidence from emerging economics

Several studies have shown that the level of trust between agents is a determinant of financial decisions. This paper studies this issue further by analyzing whether the trust distance between two countries can explain bilateral stock market correlations among emerging countries. One finding is that a smaller trust distance among nations is related to a higher stock market correlation. This effect seems to be more pronounced in active-trading countries than thin-trading countries. Finally, we confirm the effect of trust distance upon stock market correlations by excluding extreme observations. Keywords: International financial markets, Stock market correlation, Trust distance, JEL classification: G15, F15, D31, G11