Department of Finance CBA 6.278
McCombs School of Business
2110 Speedway, Stop B6600
Austin, TX 78712
Institutional Affiliation: University of Texas at Austin
NBER Working Papers and Publications
|August 2018||A Walrasian Theory of Sovereign Debt Auctions with Asymmetric Information|
with Harold Cole, Guillermo Ordoñez: w24890
How does investors' information about a country's fundamentals, and the fact that this information may be asymmetrically held, affect a country's financing cost? Motivated by this question, and by the observation that sovereign bonds are usually auctioned in large lots to a large number of potential investors, we develop a novel model of auctions with asymmetric information that relies on price-taking and rational expectations. We first characterize sovereign bond prices for different degrees of asymmetric information under two commonly-used protocols: discriminatory-price auctions and uniform-price auctions. We show that there is trade-off between these protocols if information is sufficiently asymmetric: expected bond yields are higher when pricing is discriminatory, but yield volatility...
|June 2016||Debt Crises: For Whom the Bell Tolls|
with Harold Cole, Guillermo Ordoñez: w22330
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 conditio...