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Information Revelation, Liquidity Shocks, the Volatility and the Level of Bond Spreads

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  • Peter Benczur

Abstract

Liquidity is often cited as an important component of asset prices, particularly for sovereign bonds. Relative to canonical explanations (asymmetric information, thin markets), this paper presents a different source of liquidity risk: in a Diamond-Dybvig type model, where agents face a liquidity shock (becoming "more risk-averse" early consumers), the speed of public information revelation about default risk influences bond spreads. Under reasonable parameter values, accelerated information revelation may increase spreads by 50%. Depending on parameters, revealing information may increase or decrease not only the welfare of the issuer (the issue price), but also the expected utility of investors. Copyright (c) The London School of Economics and Political Science 2005.

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  • Peter Benczur, 2005. "Information Revelation, Liquidity Shocks, the Volatility and the Level of Bond Spreads," Economica, London School of Economics and Political Science, vol. 72(285), pages 95-119, February.
  • Handle: RePEc:bla:econom:v:72:y:2005:i:285:p:95-119
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