Information Spillovers in Sovereign Debt Markets
Harold Cole (),
Daniel Neuhann () and
Guillermo Ordonez ()
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Harold Cole: University of Pennsylvania
Daniel Neuhann: University of Texas at Austin
PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania
We develop a theory of information spillovers in primary sovereign bond markets where governments raise funds from a common pool of competitive in-vestors who may acquire information about default risk and later trade in sec-ondary markets. Strategic complementarities in information acquisition lead to the co-existence of an informed regime with high yields and high volatility, and a Pareto-dominant uninformed regime with low yields and low volatility. Small shocks to default risk in a single country may trigger information acquisition, retrenchment of capital flows, and sharp yield increases within and across coun-tries. Competitive secondary markets strengthen information acquisition incen-tives, raise primary market yields, and amplify spillovers.
Pages: 52 pages
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Working Paper: Information Spillovers in Sovereign Debt Markets (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:21-011
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