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Mispricing of Risk in Sovereign Bond Markets with Asymmetric Information
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Benedikt Mihm
Published/Copyright:
November 30, 2019
Abstract
The likelihood that a government will repay its sovereign debt depends both on the amount of debt it issues and on the government’s future ability to repay. Whilst the former is publicly observable, the government may have more information about the latter than investors. This paper shows that this asymmetric information problem impairs the market’s ability to differentiate economies according to their fiscal sustainability, and can lead to a disconnect between bond prices and default risk. The model can help rationalise the behaviour of Eurozone bond prices prior to the recent European sovereign debt crisis.
Published Online: 2019-11-30
Published in Print: 2016-12-01
© 2019 by Walter de Gruyter Berlin/Boston
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Articles in the same Issue
- Contagion of Self-Interested Behavior: Evidence from Group Dictator Game Experiments
- The Impact of the German Child Benefit on Household Expenditures and Consumption
- Semi-Parametric Estimates of Taylor Rules for a Small, Open Economy – Evidence from Switzerland
- Mispricing of Risk in Sovereign Bond Markets with Asymmetric Information
- Acknowledgements
- Index: Volume 17, 2016
Articles in the same Issue
- Contagion of Self-Interested Behavior: Evidence from Group Dictator Game Experiments
- The Impact of the German Child Benefit on Household Expenditures and Consumption
- Semi-Parametric Estimates of Taylor Rules for a Small, Open Economy – Evidence from Switzerland
- Mispricing of Risk in Sovereign Bond Markets with Asymmetric Information
- Acknowledgements
- Index: Volume 17, 2016
