International Equity Indexes and Public Trust

Abstract

This article makes use of a unique dataset accounting for public trust towards alternative institutions within 27 countries, thereby yielding a local perspective on the trustworthiness of governments, the media, and the business environment as a whole. The results indicate that this local perspective adds potential value for forming rational investment decisions in a global setting that are not distorted by foreign perspectives. The author takes the perspective of a U.S. investor by considering U.S. dollar–denoted international equity indices and building trust-based portfolios, which are compared to traditional market-capitalization-weighted, GDP-weighted, ΔGDP-weighted, and equal-weighted portfolio schemes. They show that accounting for trust does entail valuable information for international equity allocation, especially with respect to fast-growing emerging economies.