Information Spillovers and Sovereign Debt: Theory Meets the Eurozone Crisis

Harold Cole, Daniel Neuhann and Guillermo Ordonez

No 30216, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a theory of information spillovers in sovereign bond markets in which investors can acquire information about default risk before trading in primary and secondary markets. If primary markets are structured as multi-unit discriminatory-price auctions, an endogenous winner’s curse leads to strategic complementarities in information acquisition. As a result, shocks to default risk in one country may trigger crisis episodes with widespread information acquisition, sharp increases in the level and volatility of yields in risky countries, falling yields in safe countries, endogenous market segmentation, and arbitrage profits between primary and secondary markets. These predictions are consistent with the behavior of primary and secondary market yields, market segmentation, and measures of information acquisition during the Eurozone sovereign debt crisis.

JEL-codes: D44 E6 F34 G15 (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-eec and nep-opm
Note: IFM
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Working Paper: Information Spillovers and Sovereign Debt: Theory Meets the Eurozone Crisis (2022)
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