IDEAS home Printed from https://ideas.repec.org/p/has/discpr/0114.html
   My bibliography  Save this paper

Learning, noise traders, the volatility and the level of bond spreads

Author

Listed:
  • Peter Benczur

    () (Central Bank of Hungary)

Abstract

According to various studies, sovereign bond spreads often deviate from any "sensible" perception of default risk. It is usually attributed to behavioral effects (overreaction) or illiquidity. The former explanation imposes some irrationality or bounded rationality on investors; while the latter usually relies on some informational asymmetry or thin markets. The paper presents a different source of liquidity risk: in a Diamond-Dybvig type model, where agents face a liquidity risk (becoming more risk-averse early consumers), changes in the speed of public learning about default risk may increase bond spreads. This effect operates through a link between future volatility and current levels: increased expected future price volatility (a volatility effect) leads to lower prices today (a level effect). Under reasonable parameter values, accelerated information revelation may increase spreads by 50%. I also compare the welfare of the issuer and investors under different speeds of learning: revealing information may be good or bad for the issuer (issue prices may increase or decrease), and also for the investors (ex ante utility might be higher or lower).

Suggested Citation

  • Peter Benczur, 2001. "Learning, noise traders, the volatility and the level of bond spreads," IEHAS Discussion Papers 0114, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  • Handle: RePEc:has:discpr:0114
    as

    Download full text from publisher

    File URL: http://econ.core.hu/doc/dp/dp/benczur.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Krebs, Tom, 1999. "Information and asset prices in complete markets exchange economies," Economics Letters, Elsevier, vol. 65(1), pages 75-83, October.
    2. Grossman, Sanford J & Miller, Merton H, 1988. " Liquidity and Market Structure," Journal of Finance, American Finance Association, vol. 43(3), pages 617-637, July.
    3. Redding, Lee S., 1999. "Negative nominal interest rates and the liquidity premium," Economics Letters, Elsevier, vol. 62(2), pages 213-216, February.
    4. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, pages 14-23.
    5. Ederington, Louis H & Lee, Jae Ha, 1993. " How Markets Process Information: News Releases and Volatility," Journal of Finance, American Finance Association, vol. 48(4), pages 1161-1191, September.
    6. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, pages 421-436.
    7. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, pages 561-574.
    8. Harvey, Campbell R & Huang, Roger D, 1991. "Volatility in the Foreign Currency Futures Market," Review of Financial Studies, Society for Financial Studies, pages 543-569.
    9. Jones, Charles M. & Kaul, Gautam & Lipson, Marc L., 1994. "Information, trading, and volatility," Journal of Financial Economics, Elsevier, vol. 36(1), pages 127-154, August.
    10. Cassano, Mark A., 1999. "Learning and mean reversion in asset returns," The Quarterly Review of Economics and Finance, Elsevier, vol. 39(4), pages 529-545.
    11. Amihud, Yakov & Mendelson, Haim, 1991. " Liquidity, Maturity, and the Yields on U.S. Treasury Securities," Journal of Finance, American Finance Association, vol. 46(4), pages 1411-1425, September.
    12. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, pages 421-436.
    13. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-574, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alfonso Mendoza, 2004. "Modelling long memory and risk premia in Latin American sovereign bond markets," Money Macro and Finance (MMF) Research Group Conference 2003 65, Money Macro and Finance Research Group, revised 13 Oct 2004.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:has:discpr:0114. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Adrienn Foldi). General contact details of provider: http://edirc.repec.org/data/iehashu.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.