Dispersed Information and Sovereign Risk Premia

In this paper, we examine empirically the link between sovereign bond spreads and the dispersion in economic forecasters' forecasts about a country's macroeconomic fundamentals. We conjecture that forecast dispersion is a proxy for dispersed information among investors. First, we show that economies with more dispersed forecasts about their macroeconomic fundamentals bear a higher cost of debt. Second, we propose an index of "informational interdependence" that reflects the extent to which countries are linked, if any, through dispersed information. Third, we demonstrate that countries are linked through dispersed information. Finally, by applying results from the spatial econometrics literature, we quantify the role that informational interdependence plays in the transmission of shocks across sovereign bond markets.