Price volatility in the secondary market and bidders’ heterogeneous behavior in Spanish Treasury auctions

We use multi-unit multi-bid common value auction models with private information to draw empirical implications on how bidding behavior in bond auctions is affected by secondary market price volatility, implications that we test using individual bidding data for 88 bond auctions held between 2003 and 2007 by the Spanish Treasury. The main novelty of the paper is that we analyze the effect of volatility in bidders heterogeneous behavior within an auction. We provide evidence that, as the theoretical models predict, the heterogeneity of bidders’ bid shading increases with volatility and that, on average across auctions, bid shading and bidders’ profit also increase with volatility.