Abstract
Our study aims to narrow the existing gap in the academic literature on cultural determinants of stock market liquidity by addressing the problem through a completely new lens - that of the international investorís point of view. To do this, we resort to bringing together the Önancial and psychological concepts and use a proxy that can measure the perception an individual investor has upon the di§erences between his/her home country and other countries.The motivation behind this decision is as follows: despite there being a vast majority of studies analyzing the cross-country cultural distance e§ects upon the stock market liquidity, they only resume to describing those e§ects through the perspective of the domestic investor. We decided to go one step further and employ a proxy to capture the e§ects of the di§erence between the home country and the target country upon an investorís decisions to trade internationally, which in turn, can a§ect the overall liquidity of the stock market in the target country. This proxy is called "psychic distance stimuli" and was Örst measured and used by Douglas Dow. We performed the analysis on a rather extensive sample of 21 developed and 24 developing countries, spanning an interval of 22 years, beginning in 1996. The results conÖrm our hypothesis that the measure of psychic distance plays a signiÖcant role in explaining the liquidity of the stock market in the target country.
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