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Information Spillovers and Sovereign Debt: Theory Meets the Eurozone Crisis

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  • Harold L. Cole
  • Daniel Neuhann
  • Guillermo Ordoñez
Abstract
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.

Suggested Citation

  • Harold L. Cole & Daniel Neuhann & Guillermo Ordoñez, 2022. "Information Spillovers and Sovereign Debt: Theory Meets the Eurozone Crisis," NBER Working Papers 30216, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30216
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    Cited by:

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    2. Mauricio Barbosa-Alves & Javier Bianchi & César Sosa-Padilla, 2024. "International Reserve Management under Rollover Crises," Working Papers 805, Federal Reserve Bank of Minneapolis.

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    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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