Information Spillovers in Sovereign Debt Markets

Harold Cole, Daniel Neuhann () and Guillermo Ordonez
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Daniel Neuhann: University of Texas at Austin

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: 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
Date: 2020-11-25
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Working Paper: Information Spillovers in Sovereign Debt Markets (2016)
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