Trust and stock market volatility in the time of COVID-19

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The outbreak of the COVID-19 pandemic hit the world’s economy unprepared and led to uncertainty on global stock markets. While some governments imposed drastic countermeasures (e.g. China), others such as the Brazilian and the American governments systematically downplayed the dangers of COVID-19 at the beginning of the pandemic. These different responses to the crisis were discussed in the public leading to the question of whether governments took the right path.

“Trust is the single most important commodity that will determine the fate of a society” Francis Fukuyama (2020)

Further, it is heavily discussed whether the type of regime is of significant importance during the COVID-19 pandemic. Following Francis Fukuyama (2020), “there will be some high-performing autocracies and some with disastrous outcomes. There will be a similar, though likely smaller, variance in outcomes among democracies.” He argues that the type of regime will not be the key factor in success. Rather, trust in a country’s government will determine a country’s performance during the crisis. As he puts it, “trust is the single most important commodity that will determine the fate of a society. In a democracy no less than in a dictatorship, citizens have to believe that the executive knows what it is doing”. But trust in a country’s government might only be one side of the coin as trust in fellow citizens obeying the government’s orders might also be of crucial importance (Goldstein and Wiedemann, 2020; Mehari, 2020).

How to proxy for trust?

In our recent research study, we have thus analyzed whether societal trust (i.e. trust in anonymous others) and trust in the country’s government among citizens affect a stock market’s volatility during the ongoing corona crisis. The rationale behind this is that societal trust and trust in a country’s government significantly reduce uncertainty among investors and therefore affect a stock market’s volatility. Following the existing literature (e.g. Guiso et al., 2010; Johnson and Mislin, 2012; Knack and Keefer, 1997; Sapienza et al., 2013), trust in society is proxied by data coming from World Values Survey using the response to the question “Generally speaking, would you say that most people can be trusted or that you need to be very careful in dealing with people?” We use the proportion of respondents answering with “most people can be trusted” as a score for societal trust.

To measure trust in a country’s government among citizens, we use the response to the World Values Survey’s question “Could you tell me how much confidence you have in the government: is it a great deal of confidence, quite a lot of confidence, not very much confidence or none at all?” We construct a score for trust in the country’s government by adding the proportion of respondents answering with “a great deal of confidence” and the proportion of those answering with “quite a lot of confidence”.

Market volatility is significantly lower in high-trust countries in reaction to COVID-19 case announcements

For both trust scores, we construct the Trust \, dummy variable indicating whether a country is a high-trust country. A country is defined as a high-trust country when the country’s trust score is equal to or larger than the median of all trust scores. To investigate the impact of trust on stock market volatility during the crisis, we consider the following straightforward panel regression model:

(1)   \begin{equation*} Market \ Volatility_{i,t} = \beta_0 & + \beta_1 \times Cases \ growth \ rate_{i,t} \ & + \beta_2 \times Trust \  dummy_{i,t} \times Cases \ growth \ rate_{i,t}  + \varepsilon__{i,t} \ \ \end{equation*}

where i is the country and t denotes the trading day. Market \ Volatility_{i,t} is the 5-day moving average volatility and the Cases \ growth \ rate is the logarithmic growth rate of confirmed COVID-19 cases in country i per million inhabitants at time t.

Dependent Variable: Market VolatilityModel (1)Model (2)
Cases growth rate0.0073**  0.0058**  
Cases growth rate × Trust dummy−0.0070**    
Cases growth rate × Trust in Government dummy−0.0055**    
Country FE and Time FEyesyes
Country FE × Time FEyesyes

Using a sample consisting of 47 countries, we find a positive and statistically significant coefficient on cases growth rate, indicating that market volatility increases with an increase in the growth rate of confirmed COVID-19 cases. However, more importantly, we find a negative and statistically significant coefficient on the interaction term between the cases growth rate and our trust dummy. Our finding implies that stock market volatility in high-trust countries exhibits significantly less increase when the growth rate of confirmed COVID-19 cases increases. Although not reported for reasons of brevity, our results hold in univariate and multivariate tests as well as when using different proxies for trust.

As a possible explanation for this finding, we propose that trust in a government’s actions during the pandemic as well as trust in fellow citizens obeying the government’s orders significantly reduces uncertainty among investors. Therefore, the reaction to an increase in the number of COVID-19 infections is dampened. Our research findings are in line with Francis Fukuyama (2020); both societal trust and trust in the government play an essential role during the COVID-19 pandemic. Simply put, more of both eventually leads to calmer financial markets.


Fukuyama, F. (2020). The thing that determines a country’s resistance to the coronavirus.

Goldstein, D. and J. Wiedemann (2020). Who Do You Trust? The Consequences of Partisanship and Trust in Government for Public Responsiveness to COVID-19. SSRN Electronic Journal. doi:10.2139/ssrn.35805475.

Guiso, L., P. Sapienza, and L. Zingales (2010). Civic capital as the missing link. NBER Working Paper Series. doi:10.1016/B978-0-444-53187-2.00010-3.

Johnson, N. D. and A. Mislin (2012). How Much Should We Trust the World Values Survey Trust Question? Economics Letters 116, 210–212. doi:10.1016/j.econlet.2012.02.010.

Knack, S. and P. Keefer (1997). Does social capital have an economic payoff? A cross-country investigation. The Quarterly Journal of Economics 112 (4), 1251–1288. doi:10.1162/003355300555475.

Mehari, Y. (2020). The Role of Social Trust in Citizen Mobility During COVID-19. SSRN Electronic Journal. doi:10.2139/ssrn.3607668.

Sapienza, P., A. Toldra-Simats, and L. Zingales (2013). Understanding trust. The Economic Journal 123, 1313–1332. doi:10.1111/ecoj.12036.

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