Liquidity Shocks, Market Maker Turnover, and Bidding Behavior in Treasury Auctions
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Liquidity Shocks, Market Maker Turnover, and Bidding Behavior in Treasury Auctions. / Gonzalez-Eiras, Martin; Rudiger, Jesper.
2017.Research output: Working paper › Research
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TY - UNPB
T1 - Liquidity Shocks, Market Maker Turnover, and Bidding Behavior in Treasury Auctions
AU - Gonzalez-Eiras, Martin
AU - Rudiger, Jesper
PY - 2017
Y1 - 2017
N2 - We use bid data from Argentinian Treasury bill auctions from 1996 to 2000 to study how banks' balance sheet and past performance affect bidding behavior. Exploiting variation in regulations for market making activity we show that when banks fear losing their market maker status, they bid more aggressively. They also bid more aggressively for existing securities that are reissued when the regulation tightens the requirements for secondary market participation. Consistent with regulations which imply that auctioned securities are not a prime source of liquidity, we find that banks which face liquidity needs bid less aggressively for them. A novel implication of our results is that in institutional settings that feature turnover of market makers, bidding behavior should be modeled in a dynamic setting. We introduce a dynamic model and show that static estimates over-predict true valuations when market makers may lose their status.
AB - We use bid data from Argentinian Treasury bill auctions from 1996 to 2000 to study how banks' balance sheet and past performance affect bidding behavior. Exploiting variation in regulations for market making activity we show that when banks fear losing their market maker status, they bid more aggressively. They also bid more aggressively for existing securities that are reissued when the regulation tightens the requirements for secondary market participation. Consistent with regulations which imply that auctioned securities are not a prime source of liquidity, we find that banks which face liquidity needs bid less aggressively for them. A novel implication of our results is that in institutional settings that feature turnover of market makers, bidding behavior should be modeled in a dynamic setting. We introduce a dynamic model and show that static estimates over-predict true valuations when market makers may lose their status.
KW - Faculty of Social Sciences
KW - Treasury Auctions
KW - Multi-unit Auctions
KW - Structural Estimation
KW - Bidding Behavior
KW - Balance-sheet
KW - Data
KW - Market Making
M3 - Working paper
T3 - University of Copenhagen. Institute of Economics. Discussion Papers (Online)
BT - Liquidity Shocks, Market Maker Turnover, and Bidding Behavior in Treasury Auctions
ER -
ID: 182540305