Working Paper: NBER ID: w28459
Authors: Harold L. Cole; Daniel Neuhann; Guillermo Ordoñez
Abstract: Using a novel data set containing all bids by all bidders for Mexican government bonds from 2001 to 2017, we demonstrate that asymmetric information about default risk is a key determinant of primary market bond yields. Empirically, large bidders do not pay more for bonds than the average bidder but their bids are accepted more frequently. We construct a model where investors may differ in wealth, risk aversion, market power and information, and find that only heterogeneous information can qualitatively account for these patterns. Moreover, asymmetric information about rare disasters can quantitatively match key moments of bids and yields, both within and across periods.
Keywords: asymmetric information; sovereign debt; bond yields; Mexican data
JEL Codes: E5; E6; H63; O23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| asymmetric information about default risk (D82) | bidding behavior (D44) |
| asymmetric information about default risk (D82) | bond prices (G12) |
| large bidders (D44) | bidding behavior (D44) |
| uninformed investors (G14) | refrain from bidding at high marginal prices (D44) |
| winners' curse phenomenon (D44) | uninformed investors (G14) |
| asymmetric information (D82) | differences in bidding behavior (D44) |
| asymmetric information (D82) | bond yields (G12) |