Information Spillovers and Sovereign Debt: Theory Meets the Eurozone Crisis

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 sovereign bond markets in which investors can acquire information about default risk before trading in primaryand secondary markets. If primary markets are structured as multi-unitdiscriminatory-price auctions, an endogenous winner’s curse leads to strategiccomplementarities 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 withthe behavior of primary and secondary market yields, market segmentation, and measures of information acquisition during the Eurozone sovereign debt crisis.

Keywords: Schooling (search for similar items in EconPapers)
Pages: 69 pages
Date: 2022-06-28
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Citations: View citations in EconPapers (3)

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Working Paper: Information Spillovers and Sovereign Debt: Theory Meets the Eurozone Crisis (2022)
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