Information Spillovers and Sovereign Debt: Theory Meets the Eurozone Crisis.

The article develops a theoretical model of information spillovers in sovereign bond markets, focusing on how investors acquire and use information about default risk in primary multi-unit discriminatory-price auctions and subsequent secondary markets. It shows that shocks to default risk in one country can trigger widespread information acquisition, leading to increased yield levels and volatility in risky countries, market segmentation, and arbitrage opportunities between primary and secondary markets. The model is applied to the 2010 Eurozone Sovereign Debt Crisis, providing evidence that auction informativeness increased significantly in Portugal and Italy (periphery countries) but not in Germany and France (core countries), consistent with a "wake-up call" narrative. Empirical findings include heightened sensitivity of secondary market yields to primary market yields, increased primary-secondary yield spreads, and shifts in foreign investor holdings, supporting the model's predictions about information-driven contagion and market dynamics during sovereign debt crises.