Information Spillovers and Sovereign Debt: Theory Meets the Eurozone Crisis / Harold L. Cole, Guillermo Ordoñez, Daniel Neuhann.

Format:

Book

Author/Creator:

Cole, Harold L.

Contributor:

National Bureau of Economic Research.

Neuhann, Daniel.

Ordoñez, Guillermo.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30216.

NBER working paper series no. w30216

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

We develop a theory of information spillovers in sovereign bond markets in which investors can acquire information about default risk before trading in primary and secondary markets. If primary markets are structured as multi-unit discriminatory-price auctions, an endogenous winner's curse leads to strategic complementarities 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 with the behavior of primary and secondary market yields, market segmentation, and measures of information acquisition during the Eurozone sovereign debt crisis.

Notes:

Print version record

July 2022.