Does trust contribute to stock market development?

• Published in: Economic modelling Vol. 52; pp. 239 - 250
• Main Authors: Ng, Adam, Ibrahim, Mansor H., Mirakhor, Abbas
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01-01-2016; Elsevier Science Ltd
• Subjects: Bayesian model averaging; Institution; Liquidity; Macroeconomics; Manycountries; Securities markets; Social capital; Stock exchanges; Stock market; Studies; Trust; C11; O17; O16; G02; Bayesian model averaging; Institution; Stock market; P52; Trust; Social capital
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2014.10.056

In view of the increasing contributions of social capital in financial development, we examine the relevance of social capital in stock market development by applying Bayesian model averaging on 37 variables across 60 countries from 2000 to 2006. The results demonstrate that trust is a robust and positive determinant of stock market depth and liquidity, and that trust is the most relevant component of social capital in market development. Macroeconomic instability in the form of inflationary changes has a dampening effect on trust in the trading of stock. Further, social capital and its components, particularly trust, are more relevant to stock market development in countries with weak rule of law, non-Organization for Economic Co-operation and Development (non-OECD) and Organization of Islamic Co-operation (OIC) countries that are generally characterized by lower formal institutional quality. Our results seek to reinforce the relevance of social capital in complementing the much needed reform of stock markets globally.
•Trust is a positive determinant of stock market depth and liquidity.•Trust is the most relevant component of social capital in stock market development.•Inflationary changes can potentially dampen trust in the trading of stock.•Social capital, particularly trust, is particularly relevant in countries characterized by lower formal institutional quality.