IDEAS home Printed from https://ideas.repec.org/p/chf/rpseri/rp0722.html
   My bibliography  Save this paper

Declining Valuations And Equilibrium Bidding In Central Bank Refinancing Operations

Author

Listed:
  • Christian Ewerhart

    (University of Zurich)

  • Nuno Cassola

    (European Central Bank)

  • Natacha Valla

    (Banque de France)

Abstract

Among the most puzzling observations for the euro money market are the bid shading in the weekly refinancing operations and the development of interest rate spreads. To explain these observations, we consider a standard divisible-good auction à la Klemperer and Meyer (1989) with uniform or discriminatory pricing, and place it in the context of a secondary market for interbank credit. The analysis links the observations for the euro area to the endogenous choice of collateral in credit transactions. We also discuss the Eurosystem’s apparent preference for the discriminatory pricing rule.

Suggested Citation

  • Christian Ewerhart & Nuno Cassola & Natacha Valla, 2007. "Declining Valuations And Equilibrium Bidding In Central Bank Refinancing Operations," Swiss Finance Institute Research Paper Series 07-22, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp0722
    as

    Download full text from publisher

    File URL: http://ssrn.com/abstract=1011122
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Engelbrecht-Wiggans, Richard & Kahn, Charles M., 1998. "Multi-Unit Pay-Your-Bid Auctions with Variable Awards," Games and Economic Behavior, Elsevier, vol. 23(1), pages 25-42, April.
    2. Linzert, Tobias & Nautz, Dieter & Bindseil, Ulrich, 2007. "Bidding behavior in the longer term refinancing operations of the European Central Bank: Evidence from a panel sample selection model," Journal of Banking & Finance, Elsevier, vol. 31(5), pages 1521-1543, May.
    3. Christian Ewerhart & Nuno Cassola & Steen Ejerskov & Natacha Valla, 2009. "Optimal allotment policy in central bank open market operations," The European Journal of Finance, Taylor & Francis Journals, vol. 15(4), pages 405-420.
    4. Lawrence M. Ausubel & Peter Cramton & Marek Pycia & Marzena Rostek & Marek Weretka, 2014. "Demand Reduction and Inefficiency in Multi-Unit Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(4), pages 1366-1400.
    5. Nuno Cassola & Claudio Morana, 2008. "Modeling Short-Term Interest Rate Spreads in the Euro Money Market," International Journal of Central Banking, International Journal of Central Banking, vol. 4(4), pages 1-37, December.
    6. Fecht, Falko & Nyborg, Kjell G. & Rocholl, Jörg, 2008. "The price of liquidity: bank characteristics and market conditions," Discussion Paper Series 1: Economic Studies 2008,30, Deutsche Bundesbank.
    7. Hassler, Uwe & Nautz, Dieter, 2008. "On the persistence of the Eonia spread," Economics Letters, Elsevier, vol. 101(3), pages 184-187, December.
    8. Javier Santillán & Marc Bayle & Christian Thygesen, 2000. "The impact of the euro on money and bond markets," Occasional Paper Series 1, European Central Bank.
    9. Cassola, Nuno & Ewerhart, Christian & Morana, Claudio, 2007. "Structural econometric approach to bidding in the main refinancing operations of the Eurosystem," Journal of Financial Transformation, Capco Institute, vol. 19, pages 81-90.
    10. Swinkels, Jeroen M, 2001. "Efficiency of Large Private Value Auctions," Econometrica, Econometric Society, vol. 69(1), pages 37-68, January.
    11. Krishna, Vijay, 2009. "Auction Theory," Elsevier Monographs, Elsevier, edition 2, number 9780123745071.
    12. Ilan Kremer & Kjell G. Nyborg, 2004. "Divisible-Good Auctions: The Role of Allocation Rules," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 147-159, Spring.
    13. Christian Ewerhart & Nuno Cassola & Steen Ejerskov & Natacha Valla, 2007. "Manipulation in Money Markets," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 113-148, March.
    14. Yvan Lengwiler, 1999. "The multiple unit auction with variable supply," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 14(2), pages 373-392.
    15. Baltensperger, Ernst, 1974. "The Precautionary Demand for Reserves," American Economic Review, American Economic Association, vol. 64(1), pages 205-210, March.
    16. Santillán, Javier & Bayle, Marc & Thygesen, Christian, 2000. "The impact of the euro on money and bond markets," Occasional Paper Series 1, European Central Bank.
    17. Bruno Biais & David Martimort & Jean-Charles Rochet, 2000. "Competing Mechanisms in a Common Value Environment," Econometrica, Econometric Society, vol. 68(4), pages 799-838, July.
    18. LiCalzi, Marco & Pavan, Alessandro, 2005. "Tilting the supply schedule to enhance competition in uniform-price auctions," European Economic Review, Elsevier, vol. 49(1), pages 227-250, January.
    19. Xavier Freixas, 2005. "Interbank Market Integration under Asymmetric Information," The Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 459-490.
    20. Sushil Bikhchandani & Chi-fu Huang, 1993. "The Economics of Treasury Securities Markets," Journal of Economic Perspectives, American Economic Association, vol. 7(3), pages 117-134, Summer.
    21. Juan Ayuso & Rafael Repullo, 2003. "A Model of the Open Market Operations of the European Central Bank," Economic Journal, Royal Economic Society, vol. 113(490), pages 883-902, October.
    22. Viswanathan, S. & Wang, James J. D., 2002. "Market architecture: limit-order books versus dealership markets," Journal of Financial Markets, Elsevier, vol. 5(2), pages 127-167, April.
    23. repec:bla:ecnote:v:32:y:2003:i:1:p:37-66 is not listed on IDEAS
    24. Bindseil, Ulrich & Nyborg, Kjell G. & Strebulaev, Ilya A., 2002. "Bidding and performance in repo auctions: evidence from ECB open market operations," Working Paper Series 157, European Central Bank.
    25. Craig, Ben & Fecht, Falko, 2007. "The eurosystem money market auctions: A banking perspective," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2925-2944, September.
    26. Jeroen M. Swinkels, 1999. "Asymptotic Efficiency for Discriminatory Private Value Auctions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(3), pages 509-528.
    27. Breitung, Jorg & Nautz, Dieter, 2001. "The empirical performance of the ECB's repo auctions: evidence from aggregated and individual bidding data," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 839-856, November.
    28. William Poole, 1968. "Commercial Bank Reserve Management In A Stochastic Model: Implications For Monetary Policy," Journal of Finance, American Finance Association, vol. 23(5), pages 769-791, December.
    29. Draaisma, Teun & Noussair, Charles, 1997. "Optimal bidding in a uniform price auction with multi-unit demand1," Economics Letters, Elsevier, vol. 56(2), pages 157-162, October.
    30. Diamond, Douglas W & Verrecchia, Robert E, 1991. "Disclosure, Liquidity, and the Cost of Capital," Journal of Finance, American Finance Association, vol. 46(4), pages 1325-1359, September.
    31. Duffie, Darrell, 1996. "Special Repo Rates," Journal of Finance, American Finance Association, vol. 51(2), pages 493-526, June.
    32. Linzert, Tobias & Nautz, Dieter & Bindseil, Ulrich, 2004. "The longer term refinancing operations of the ECB," Working Paper Series 359, European Central Bank.
    33. Hartmann, Philipp & Manna, Michele & Manzanares, Andres, 2001. "The microstructure of the euro money market," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 895-948, November.
    34. Noussair, Charles, 1995. "Equilibria in a Multi-object Uniform Price Sealed Bid Auction with Multi-unit Demands," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 5(2), pages 337-351, March.
    35. Cassola, Nuno & Ewerhart, Christian & Valla, Natacha, 2005. "Equilibrium and inefficiency in fixed rate tenders," Working Paper Series 554, European Central Bank.
    36. Nautz, D., 1995. "Optimal bidding in multi-unit auctions with many bidders," Economics Letters, Elsevier, vol. 48(3-4), pages 301-306, June.
    37. Yawitz, Jess B., 1977. "An Analytical Model of Interest Rate Differentials and Different Default Recoveries," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(3), pages 481-490, September.
    38. Richard Engelbrecht-Wiggans & Charles M. Kahn, 1998. "Multi-unit auctions with uniform prices," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(2), pages 227-258.
    39. Menezes F. M. & Monteiro, P. K., 1996. "Existence of equilibrium in a descriminatory price auction," Mathematical Social Sciences, Elsevier, vol. 31(1), pages 60-61, February.
    40. Ulrike Neyer & Jürgen Wiemers, 2004. "The Influence of a Heterogeneous Banking Sector on the Interbank Market Rate in the Euro Area," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(III), pages 395-428, September.
    41. Jordan, Bradford D & Jordan, Susan D, 1997. "Special Repo Rates: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 52(5), pages 2051-2072, December.
    42. Jaime F. Zender & James J.D. Wang, 2002. "Auctioning divisible goods," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 19(4), pages 673-705.
    43. Goldreich, David, 2007. "Underpricing in Discriminatory and Uniform-Price Treasury Auctions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(2), pages 443-466, June.
    44. Robert G. Hansen, 1988. "Auctions with Endogenous Quantity," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 44-58, Spring.
    45. Simon, David P., 1994. "Markups, quantity risk, and bidding strategies at treasury coupon auctions," Journal of Financial Economics, Elsevier, vol. 35(1), pages 43-62, February.
    46. Albert S. Kyle, 1989. "Informed Speculation with Imperfect Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(3), pages 317-355.
    47. McAdams, David, 2007. "Adjustable supply in uniform price auctions: Non-commitment as a strategic tool," Economics Letters, Elsevier, vol. 95(1), pages 48-53, April.
    48. Back, Kerry & Zender, Jaime F., 2001. "Auctions of divisible goods with endogenous supply," Economics Letters, Elsevier, vol. 73(1), pages 29-34, October.
    49. Ejerskov, Steen & Martin Moss, Clara & Stracca, Livio, 2003. "How does the ECB allot liquidity in its weekly main refinancing operations? A look at the empirical evidence," Working Paper Series 244, European Central Bank.
    50. David McAdams, 2003. "Isotone Equilibrium in Games of Incomplete Information," Econometrica, Econometric Society, vol. 71(4), pages 1191-1214, July.
    51. Nautz, Dieter, 1997. "How Auctions Reveal Information: A Case Study on German REPO Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 17-25, February.
    52. Robert Wilson, 1979. "Auctions of Shares," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(4), pages 675-689.
    53. Bierman, Harold & Hass, Jerome E., 1975. "An Analytical Model of Bond Risk Differentials," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 10(5), pages 757-773, December.
    54. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-1277, November.
    55. Ilan Kremer, 2004. "Underpricing and Market Power in Uniform Price Auctions," The Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 849-877.
    56. Giuseppe Bruno & Ernesto Maurizio Ordine & Antonio Scalia, 2005. "Banks� participation in the Eurosystem auctions and money market integration," Temi di discussione (Economic working papers) 562, Bank of Italy, Economic Research and International Relations Area.
    57. Back, Kerry & Zender, Jaime F, 1993. "Auctions of Divisible Goods: On the Rationale for the Treasury Experiment," The Review of Financial Studies, Society for Financial Studies, vol. 6(4), pages 733-764.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Vogel, Edgar, 2014. "MRO bidding in the presence of LTROs: an empirical analysis of the pre-crisis period," Working Paper Series 1753, European Central Bank.
    2. Nuno Cassola & Claudio Morana, 2008. "Modeling Short-Term Interest Rate Spreads in the Euro Money Market," International Journal of Central Banking, International Journal of Central Banking, vol. 4(4), pages 1-37, December.
    3. Ewerhart, Christian & Cassola, Nuno & Valla, Natacha, 2012. "Overbidding in fixed rate tenders: The role of exposure risk," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 539-549.
    4. Xavier Vives, 2011. "Strategic Supply Function Competition With Private Information," Econometrica, Econometric Society, vol. 79(6), pages 1919-1966, November.
    5. Nuno Cassola & Ali Hortaçsu & Jakub Kastl, 2013. "The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short‐Term Funds," Econometrica, Econometric Society, vol. 81(4), pages 1309-1345, July.
    6. Vives, Xavier, 2011. "A Large-Market Rational Expectations Equilibrium Model," CEPR Discussion Papers 8426, C.E.P.R. Discussion Papers.
    7. Manzano, Carolina & Vives, Xavier, 2021. "Market power and welfare in asymmetric divisible good auctions," Theoretical Economics, Econometric Society, vol. 16(3), July.
    8. Xavier Vives, 2017. "Endogenous Public Information and Welfare in Market Games," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(2), pages 935-963.
    9. repec:zbw:bofrdp:2013_021 is not listed on IDEAS
    10. Xavier Vives, 2014. "On The Possibility Of Informationally Efficient Markets," Journal of the European Economic Association, European Economic Association, vol. 12(5), pages 1200-1239, October.
    11. Jakob Korbinian Eberl, 2016. "The Collateral Framework of the Eurosystem and Its Fiscal Implications," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 69.
    12. Cassola, Nuno & Ewerhart, Christian & Morana, Claudio, 2007. "Structural econometric approach to bidding in the main refinancing operations of the Eurosystem," Journal of Financial Transformation, Capco Institute, vol. 19, pages 81-90.
    13. Di Xiao & Andreas Krause, 2022. "Bank demand for central bank liquidity and its impact on interbank markets," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 17(3), pages 639-679, July.
    14. Vives, Xavier, 2011. "Endogenous public information and welfare," IESE Research Papers D/925, IESE Business School.
    15. Xavier Vives, 2010. "Asset Auctions, Information, and Liquidity," Journal of the European Economic Association, MIT Press, vol. 8(2-3), pages 467-477, 04-05.
    16. Schnatz, Bernd, 2006. "Is reversion to PPP in euro exchange rates non-linear?," Working Paper Series 682, European Central Bank.
    17. Ollikka, Kimmo & Tukiainen, Janne, 2013. "Central bank liquidity auction mechanism design and the interbank market," Research Discussion Papers 21/2013, Bank of Finland.
    18. Vergote, Olivier & Sugo, Tomohiro, 2020. "Who takes the ECB’s targeted funding?," Working Paper Series 2439, European Central Bank.
    19. Ollikka, Kimmo & Tukiainen, Janne, 2013. "Central bank liquidity auction mechanism design and the interbank market," Bank of Finland Research Discussion Papers 21/2013, Bank of Finland.
    20. Pycia, Marek & Woodward, Kyle, 2021. "Auctions of Homogeneous Goods: A Case for Pay-as-Bid," CEPR Discussion Papers 15656, C.E.P.R. Discussion Papers.
    21. Nikolaou, Kleopatra, 2009. "Liquidity (risk) concepts: definitions and interactions," Working Paper Series 1008, European Central Bank.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Burkett, Justin & Woodward, Kyle, 2020. "Uniform price auctions with a last accepted bid pricing rule," Journal of Economic Theory, Elsevier, vol. 185(C).
    2. Kastl, Jakub, 2012. "On the properties of equilibria in private value divisible good auctions with constrained bidding," Journal of Mathematical Economics, Elsevier, vol. 48(6), pages 339-352.
    3. Monostori, Zoltán, 2013. "Diszkriminatív áras és egyenáras aukciók [Discriminatory and uniform-price auctions]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(10), pages 1048-1074.
    4. Damianov, Damian S. & Becker, Johannes Gerd, 2010. "Auctions with variable supply: Uniform price versus discriminatory," European Economic Review, Elsevier, vol. 54(4), pages 571-593, May.
    5. Cassola, Nuno & Ewerhart, Christian & Valla, Natacha, 2005. "Equilibrium and inefficiency in fixed rate tenders," Working Paper Series 554, European Central Bank.
    6. Raphaële Préget, 2004. "Adjudications des valeurs du Trésor," Revue Française d'Économie, Programme National Persée, vol. 18(4), pages 63-110.
    7. Xavier Vives, 2011. "Strategic Supply Function Competition With Private Information," Econometrica, Econometric Society, vol. 79(6), pages 1919-1966, November.
    8. repec:awi:wpaper:0460 is not listed on IDEAS
    9. LiCalzi, Marco & Pavan, Alessandro, 2005. "Tilting the supply schedule to enhance competition in uniform-price auctions," European Economic Review, Elsevier, vol. 49(1), pages 227-250, January.
    10. Pycia, Marek & Woodward, Kyle, 2021. "Auctions of Homogeneous Goods: A Case for Pay-as-Bid," CEPR Discussion Papers 15656, C.E.P.R. Discussion Papers.
    11. Khezr, Peyman & MacKenzie, Ian A., 2018. "Permit market auctions with allowance reserves," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 283-306.
    12. Matti Keloharju & Kjell G. Nyborg & Kristian Rydqvist, 2005. "Strategic Behavior and Underpricing in Uniform Price Auctions: Evidence from Finnish Treasury Auctions," Journal of Finance, American Finance Association, vol. 60(4), pages 1865-1902, August.
    13. Zhaogang Song & Haoxiang Zhu, 2014. "QE Auctions of Treasury Bonds," Finance and Economics Discussion Series 2014-48, Board of Governors of the Federal Reserve System (U.S.).
    14. Manzano, Carolina & Vives, Xavier, 2021. "Market power and welfare in asymmetric divisible good auctions," Theoretical Economics, Econometric Society, vol. 16(3), July.
    15. Song, Zhaogang & Zhu, Haoxiang, 2018. "Quantitative easing auctions of Treasury bonds," Journal of Financial Economics, Elsevier, vol. 128(1), pages 103-124.
    16. Cumpston, Anne & Khezr, Peyman, 2020. "Multi-Unit Auctions: A Survey of Theoretical Literature," MPRA Paper 101336, University Library of Munich, Germany.
    17. Bourjade, Sylvain, 2009. "Strategic price discounting and rationing in uniform price auctions," Economics Letters, Elsevier, vol. 105(1), pages 23-27, October.
    18. Anderson, Edward & Holmberg, Pär, 2018. "Price instability in multi-unit auctions," Journal of Economic Theory, Elsevier, vol. 175(C), pages 318-341.
    19. Erwann SbaÏ & Olivier Armantier, 2006. "Estimation and comparison of treasury auction formats when bidders are asymmetric," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(6), pages 745-779.
    20. Alvarez, Francisco & Mazon, Cristina, 2007. "Comparing the Spanish and the discriminatory auction formats: A discrete model with private information," European Journal of Operational Research, Elsevier, vol. 179(1), pages 253-266, May.
    21. Marco Pagnozzi, 2007. "Should Speculators Be Welcomed in Auctions?," CSEF Working Papers 176, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

    More about this item

    Keywords

    Eurosystem; discriminatory auction; bid shading; collateral;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp0722. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ridima Mittal (email available below). General contact details of provider: https://edirc.repec.org/data/fameech.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.