Essays on Sovereign Bond Markets.

Summary In the first chapter, I examine whether short sellers are better informed about sovereign bond auctions than the market. I find, on average, a large increase in short-sale demand prior to the auction. Nevertheless, short-sale demand does not predict a future increase in yield. Thus, short sellers are not better informed about the outcome of auctions and do not interpret better than the market.In the second chapter, I develop and test a model explaining the gradual price decline observed in the days leading up to early asset sales such as Treasury auctions. In the model, risk-averse investors anticipate an asset sale whose magnitude - and thus price - is uncertain. I show that investors face a trade-off between hedging through a long position and speculating on the difference between the pre-sale price and the expected sale price. Due to hedging, the equilibrium price is higher than the expected selling price. As the sell date approaches, the uncertainty of the selling price decreases, the speculative short positions increase and the price decreases. Consistent with predictions, I find that the yield on Italian Treasuries increases by 1.2 basis points after the release of auction price information, relative to days without information.In the third chapter, I study the relationship between prices and repo rates during the subprime crisis. I find that Duffie's (1996) no-arbitrage relationship between prices and repo rates performs less well during the crisis. However, low repo rate bonds are 18.0% more likely to be more expensive than identical high repo rate bonds during the crisis, compared to only 9.0% before the crisis. Overall, while there are strong limits to arbitrage, prices and repo rates show greater co-movements during the crisis.