Do sovereign-bond issuers learn from peers?

Abstract

This paper investigates the information spillover and learning by observing among countries in the sovereign debt markets. We find that the coupon rate of a bond offering by a borrower-country is positively associated with the average coupon rate of bonds issued by peer countries during the previous three-month period and this is significant among economically similar peers. Our results are stronger among investment-grade than speculative-grade ranked countries, and they are also more significant among countries without an IMF program than those under IMF program. We, however, fail to find evidence of learning among neighboring countries or those with a common language. Our findings suggest that although learning from peers is affected by borrower-countries’ quality, sovereign bond markets learn information from their economically-similar peers, which could ensure greater price stability.