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Debt Crises: For Whom the Bell Tolls

Listed author(s):
  • Harold Cole
  • Daniel Neuhann
  • Guillermo Ordoñez

What a country has done in the past, and what other countries are doing in the present, can feedback for good or for ill in debt markets. We develop a simple model of sovereign bond markets with global investors and endogenous information acquisition about fundamental default probabilities. This model displays hysteresis and contagion in sovereign bond spreads. Small fundamental shocks in one country can induce investors to acquire information, generating price volatility and increased risk premia. These changes may also induce investors to rebalance their portfolio, generating market segmentation and information acquisition in seemingly unrelated economies. Information regimes may persist over time, requiring large improvements in fundamentals to return to more stable bond spread conditions.

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File URL: http://www.nber.org/papers/w22330.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 22330.

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Date of creation: Jun 2016
Handle: RePEc:nbr:nberwo:22330
Note: AP EFG IFM ME PE
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