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Price elasticity of demand and risk-bearing capacity in sovereign bond auctions

Author

Listed:
  • Rui Albuquerque
  • José Miguel Cardoso-Costa
  • José Afonso Faias

Abstract

The paper uses bids submitted by primary dealer banks at auctions of sovereign bonds to quantify the price elasticity of demand. The price elasticity of demand correlates strongly with the volatility of returns of the same bonds traded in the secondary market but only weakly with their bid-ask spread. It predicts same-bond post-auction returns in the secondary market, even after controlling for pre-auction volatility. The evidence suggests that the price elasticity of demand is associated with the magnitude of price pressure in the secondary market around auction days and proxies for primary dealer risk-bearing capacity.

Suggested Citation

  • Rui Albuquerque & José Miguel Cardoso-Costa & José Afonso Faias, 2024. "Price elasticity of demand and risk-bearing capacity in sovereign bond auctions," The Review of Financial Studies, Society for Financial Studies, vol. 37(10), pages 3149-3187.
    • Handle: RePEc:oup:rfinst:v:37:y:2024:i:10:p:3149-3187.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhae027
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    More about this item

    Keywords

    G12; G20; G24;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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