Download This PaperGlobal and Local Information Efficiency: An Examination of Samuelson’s Dictum
39 Pages Posted: 13 Feb 2017 Last revised: 28 May 2024
Date Written: May 26, 2024
Abstract
The global version of Samuelson’s Dictum is the conjecture that there is more informational inefficiency for global information than for country-specific information. Consistent with this conjecture, we find that sovereign CDS spreads can predict future sovereign bond yields of their underlying countries and this predictive power arises almost entirely from CDS spread’s global—rather than country-specific—component. Noting the striking similarities between the evidence in stock and sovereign bond markets, we examine the underlying mechanism for the results in both markets in parallel and find further similarities across these two markets. In both cases, information appears to flow in one direction: from the sovereign CDS market to stock and sovereign bond markets and not the other way around. Information transmission occurs mostly during the days surrounding announcements of credit-rating or outlook changes, especially downgrades. These results are broadly consistent with a setup in which information acquisition and processing is costly.
Keywords: Samuelson’s Dictum, sovereign bond, sovereign CDS, macro inefficiency.
JEL Classification: G12
Suggested Citation: Suggested Citation