Public Trust and Equity Returns

Abstract

We make use of the Edelman Trust Barometer to test for the relationship between public trust and international equity returns. The data allows for a two-dimensional split as to differentiate between the levels of trust expressed by (1) the general public and (2) informed publics. We examine the relationship between public trust indices and subsequent equity returns and find that portfolios of international stock indices, weighted and ranked according to the general level of trust, outperform classical GDP and equal-weighted portfolios. Furthermore, we differentiate between trust associated to three global institutions: business, government and media, as well as on a regional level according to developed and emerging markets. We document varying degrees of importance with respect to trust levels associated to considered institutions and across regions. Overall, we interpret public trust as a source of alpha rather than a priced risk factor.