Debt Crises: For Whom the Bell Tolls

59 Pages Posted: 13 Jun 2016

See all articles by Harold L. Cole

Harold L. Cole

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Daniel Neuhann

University of Texas at Austin, McCombs School of Business

Guillermo Ordoñez

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 2016

Abstract

What a country has done in the past, and what other countries are doing in the present, can feedback for good or for ill in debt markets. We develop a simple model of sovereign bond markets with global investors and endogenous information acquisition about fundamental default probabilities. This model displays hysteresis and contagion in sovereign bond spreads. Small fundamental shocks in one country can induce investors to acquire information, generating price volatility and increased risk premia. These changes may also induce investors to rebalance their portfolio, generating market segmentation and information acquisition in seemingly unrelated economies. Information regimes may persist over time, requiring large improvements in fundamentals to return to more stable bond spread conditions.

Suggested Citation

Cole, Harold L. and Neuhann, Daniel and Ordoñez, Guillermo, Debt Crises: For Whom the Bell Tolls (June 2016). NBER Working Paper No. w22330. Available at SSRN: https://ssrn.com/abstract=2794776

Harold L. Cole (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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Daniel Neuhann

University of Texas at Austin, McCombs School of Business ( email )

Austin, TX 78701
United States

Guillermo Ordoñez

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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