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Hedging Winner'S Curse With Multiple Bids: Evidence From The Portuguese Treasury Bill Auction

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Michael B. Gordy

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Abstract

Auctions of government securities typically permit bidders to enter multiple price-quantity bids. Despite the widespread adoption of this institutional feature and its use by bidders, the motivations behind its use and its effects on auction outcomes are not well understood theoretically and have been little explored empirically. This paper proposes that bidders use multiple bids to adjust for winner's curse: By spreading her bids, a bidder aligns her outcome more closely to the aggregate outcome of the auction. This hypothesis is tested using bidding data from treasury bill auctions in Portugal. I find that, ceteris paribus, a bidder submits a greater number of bids and disperses prices on these bids more widely when there is a greater potential for winner's curse. In particular, both these measures of bid-spreading increase with the volatility of market interest rates and the expected number of participating well-informed bidders. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technolog

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Publisher Info
Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 81 (1999)
Issue (Month): 3 (August)
Pages: 448-465
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Handle: RePEc:tpr:restat:v:81:y:1999:i:3:p:448-465

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  1. Nielsen, Kurt, 2005. "Auctioning Payment Entitlements," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24566, European Association of Agricultural Economists. [Downloadable!]
  2. Klaus Abbink & Jordi Brandts & Paul Pezanis-Christou, 2002. "Auctions for Government Securities: A Laboratory Comparison of Uniform, Discriminatory and Spanish Designs," UFAE and IAE Working Papers 551.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
    Other versions:
  3. Sara Castellanos, 2001. "A New Empirical Study of the Mexican Treasury Securities Primary Auctions: Is there more underpricing?," Levine's Working Paper Archive 625018000000000206, David K. Levine. [Downloadable!]
  4. Saikat Nandi, 1997. "Treasury auctions: what do the recent models and results tell us?," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 4-15. [Downloadable!]
  5. Michael B. Gordy, . "Multiple Bids in a Multiple-Unit Common Value Auction," Computing in Economics and Finance 1996 _021, Society for Computational Economics. [Downloadable!]
  6. Han, Bing & Longstaff, Francis A. & Merrill, Craig, 2005. "The Cherry-Picking Option in the U.S. Treasury Buyback Auctions," Working Paper Series 2004-23, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  7. Sara Castellanos, 2001. "Mexican treasury securities primary auctions," Theory workshop papers 357966000000000025, UCLA Department of Economics. [Downloadable!]
  8. Sara G. Castellanos & Marco A. Oviedo, 2004. "Optimal Bidding in the Mexican Treasury Securities Primary Auctions: Results from a Structural Econometrics Approach," Levine's Working Paper Archive 122247000000000118, David K. Levine. [Downloadable!]
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