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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

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. © 1999 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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Bibliographic 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. Wilson, Robert, 1979. "Auctions of Shares," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(4), pages 675-89, November.
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Cited by:
  1. Vives, Xavier, 2008. "Strategic supply function competition with private information," IESE Research Papers, IESE Business School D/774, IESE Business School.
  2. Michał Krawczyk, 2009. "Demand functions in Polish Treasury auctions," Bank i Kredyt, National Bank of Poland, Economic Institute, National Bank of Poland, Economic Institute, vol. 40(4), pages 31-49.
  3. 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.
  4. Eisenschmidt, Jens & Hirsch, Astrid & Linzert, Tobias, 2009. "Bidding behaviour in the ECB’s main refinancing operations during the financial crisis," Working Paper Series, European Central Bank 1052, European Central Bank.
  5. 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, Elsevier, vol. 179(1), pages 253-266, May.
  6. Sara Castellanos, 2001. "Mexican treasury securities primary auctions," Theory workshop papers, UCLA Department of Economics 357966000000000025, UCLA Department of Economics.
  7. Abbink, Klaus & Brandts, Jordi & Pezanis-Christou, Paul, 2006. "Auctions for government securities: A laboratory comparison of uniform, discriminatory and Spanish designs," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 61(2), pages 284-303, October.
  8. Michael B. Gordy, . "Multiple Bids in a Multiple-Unit Common Value Auction," Computing in Economics and Finance 1996, Society for Computational Economics _021, Society for Computational Economics.
  9. Saikat Nandi, 1997. "Treasury auctions: what do the recent models and results tell us?," Economic Review, Federal Reserve Bank of Atlanta, Federal Reserve Bank of Atlanta, issue Q 4, pages 4-15.
  10. Nielsen, Kurt, 2005. "Auctioning Payment Entitlements," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark, European Association of Agricultural Economists 24566, European Association of Agricultural Economists.
  11. Han, Bing & Longstaff, Francis A. & Merrill, Craig, 2005. "The Cherry-Picking Option in the U.S. Treasury Buyback Auctions," Working Paper Series, Ohio State University, Charles A. Dice Center for Research in Financial Economics 2004-23, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  12. Song, Zhaogang & Zhu, Haoxiang, 2014. "QE Auctions of Treasury Bonds," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2014-48, Board of Governors of the Federal Reserve System (U.S.).
  13. 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.
  14. Longstaff, Francis A & Han, Bing & Merrill, Craig, 2004. "Revenue Implications of Multi-Item Multi-Unit Auction Designs: Empirical Evidence from the U.S. Treasury Buyback Auctions," University of California at Los Angeles, Anderson Graduate School of Management, Anderson Graduate School of Management, UCLA qt7344v866, Anderson Graduate School of Management, UCLA.

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