Information Spillovers in Sovereign Debt Markets

52 Pages Posted: 1 Apr 2021

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: November 25, 2020

Abstract

We develop a theory of information spillovers in primary sovereign bond markets where governments raise funds from a common pool of competitive investors who may acquire information about default risk and later trade in secondary 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 countries. Competitive secondary markets strengthen information acquisition incentives, raise primary market yields, and amplify spillovers.

Suggested Citation

Cole, Harold L. and Neuhann, Daniel and Ordoñez, Guillermo, Information Spillovers in Sovereign Debt Markets (November 25, 2020). PIER Working Paper No. 21-011, Available at SSRN: https://ssrn.com/abstract=3815777 or http://dx.doi.org/10.2139/ssrn.3815777

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
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Guillermo Ordoñez

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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Philadelphia, PA 19104-6297
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National Bureau of Economic Research (NBER) ( email )

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