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Information Revelation, Liquidity Shocks, the Volatility and the Level of Bond Spreads
Author(s) -
Benczur Peter
Publication year - 2005
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/j.0013-0427.2005.00403.x
Subject(s) - market liquidity , bond , economics , volatility (finance) , monetary economics , information asymmetry , issuer , revelation , liquidity risk , financial economics , shock (circulatory) , microeconomics , finance , medicine , art , literature
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.