Learning, noise traders, the volatility and the level of bond spreads
Peter Benczur
No 114, CERS-IE WORKING PAPERS from Institute of Economics, Centre for Economic and Regional Studies
Abstract:
According to various studies, sovereign bond spreads often deviate from any "sensible" perception of default risk. It is usually attributed to behavioral effects (overreaction) or illiquidity. The former explanation imposes some irrationality or bounded rationality on investors; while the latter usually relies on some informational asymmetry or thin markets. The paper presents a different source of liquidity risk: in a Diamond-Dybvig type model, where agents face a liquidity risk (becoming more risk-averse early consumers), changes in the speed of public learning about default risk may increase bond spreads. This effect operates through a link between future volatility and current levels: increased expected future price volatility (a volatility effect) leads to lower prices today (a level effect). Under reasonable parameter values, accelerated information revelation may increase spreads by 50%. I also compare the welfare of the issuer and investors under different speeds of learning: revealing information may be good or bad for the issuer (issue prices may increase or decrease), and also for the investors (ex ante utility might be higher or lower).
Pages: 27 pages
Date: 2001
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)
Downloads: (external link)
http://econ.core.hu/doc/dp/dp/benczur.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to econ.core.hu:80 (A connection attempt failed because the connected party did not properly respond after a period of time, or established connection failed because connected host has failed to respond.)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:has:discpr:0114
Access Statistics for this paper
More papers in CERS-IE WORKING PAPERS from Institute of Economics, Centre for Economic and Regional Studies Contact information at EDIRC.
Bibliographic data for series maintained by Nora Horvath ( this e-mail address is bad, please contact ).