Working Paper: NBER ID: w22330
Authors: Harold Cole; Daniel Neuhann; Guillermo Ordoñez
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.
Keywords: Sovereign Debt; Information Spillovers; Yield Volatility; Capital Flows
JEL Codes: F34; F42; G15; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| small shocks to default risk (D80) | information acquisition (D83) |
| information acquisition (D83) | capital flow retrenchment (F32) |
| capital flow retrenchment (F32) | sharp yield increases (E32) |
| small shocks to default risk (D80) | sharp yield increases (E32) |
| competitive secondary markets (G10) | information acquisition incentives (D82) |
| information acquisition incentives (D82) | higher primary market yields (G12) |
| informed investors (G11) | price dispersion (L11) |
| price dispersion (L11) | adverse selection for uninformed investors (D82) |
| information acquisition (D83) | yields (G12) |
| changes in market conditions (D49) | transition between informed and uninformed regimes (D83) |