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Strategic Behaviour and Underpricing in Uniform Price Auctions: Evidence from Finnish Treasury Auctions

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Author Info
Keloharju, Matti
Nyborg, Kjell G
Rydqvist, Kristian

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Abstract

We study uniform price auctions using a dataset that includes individual bidders' demand schedules in Finnish Treasury auctions during the period 1992-99. Average underpricing amounts to 0.041% of face value. Theory suggests that underpricing may result from monopsonistic market power. We develop and test robust implications from this theory and find that it has little support in the data. For example, bidders' individual demand functions do not respond to increased competition in the manner predicted by the theory. We also present evidence that the Finnish Treasury acts strategically, taking into account the fact that the auctions are part of a repeated game between the Treasury and the primary dealers. Empirically, the main driver behind bidder behaviour and underpricing is the volatility of bond returns. Since there is no evidence that bidders are risk averse, this suggests that private information and the winner's curse may play an important role in these auctions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3586.

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Date of creation: Oct 2002
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Handle: RePEc:cpr:ceprdp:3586

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Related research
Keywords: demand functions; market power; multiunit auctions; seller behaviour; supply uncertainty; treasury auctions; underpricing; uniform price;

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Find related papers by JEL classification:
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hoidal Bjonnes, Geir, 2001. "Winner's Curse in Discriminatory Price Auctions: Evidence from the Norwegian Treasury Bill Auctions," SIFR Research Report Series 3, Institute for Financial Research. [Downloadable!]
  2. Kandel, Shmuel & Sarig, Oded & Wohl, Avi, 1999. "The Demand for Stocks: An Analysis of IPO Auctions," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(2), pages 227-47.
  3. Kjell G. Nyborg & Kristian Rydqvist & Suresh M. Sundaresan, 2002. "Bidder Behavior in Multiunit Auctions: Evidence from Swedish Treasury Auctions," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 394-424, April. [Downloadable!] (restricted)
  4. Umlauf, Steven R., 1993. "An empirical study of the Mexican Treasury bill auction," Journal of Financial Economics, Elsevier, vol. 33(3), pages 313-340, June. [Downloadable!] (restricted)
  5. Goswami, Gautam & Noe, Thomas H & Rebello, Michael J, 1996. "Collusion in Uniform-Price Auctions: Experimental Evidence and Implications for Treasury Auctions," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(3), pages 757-85. [Downloadable!] (restricted)
    Other versions:
  6. Wilson, Robert, 1979. "Auctions of Shares," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 675-89, November. [Downloadable!] (restricted)
  7. Matti Keloharju & Markku Malkamäki & Kjell G. Nyborg & Kristian Rydqvist, 2004. "A descriptive analysis of the Finnish treasury bond market 1991–1999," Finance 0405017, EconWPA. [Downloadable!]
    Other versions:
  8. Cammack, Elizabeth B, 1991. "Evidence on Bidding Strategies and the Information in Treasury Bill Auctions," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 100-130, February. [Downloadable!] (restricted)
  9. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November. [Downloadable!] (restricted)
  10. Wilson, Robert, 1977. "A Bidding Model of Perfect Competition," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 511-18, October. [Downloadable!] (restricted)
  11. Yasushi Hamao & Narasimhan Jegadeesh, 1998. "An Analysis of Bidding in the Japanese Government Bond Auctions," Journal of Finance, American Finance Association, vol. 53(2), pages 755-772, 04. [Downloadable!] (restricted)
  12. Nyborg, Kjell G. & Sundaresan, Suresh, 1996. "Discriminatory versus uniform Treasury auctions: Evidence from when-issued transactions," Journal of Financial Economics, Elsevier, vol. 42(1), pages 63-104, September. [Downloadable!] (restricted)
  13. Kyle, Albert S, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Blackwell Publishing, vol. 56(3), pages 317-55, July. [Downloadable!] (restricted)
  14. Back, Kerry & Zender, Jaime F., 2001. "Auctions of divisible goods with endogenous supply," Economics Letters, Elsevier, vol. 73(1), pages 29-34, October. [Downloadable!] (restricted)
  15. Back, Kerry & Zender, Jaime F, 1993. "Auctions of Divisible Goods: On the Rationale for the Treasury Experiment," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(4), pages 733-64. [Downloadable!] (restricted)
  16. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Orly Sade & Charles Schnitzlein & Jaime Zender, 2006. "Competition and Cooperation in Divisible Good Auctions: An Experimental Examination," Artefactual Field Experiments 0076, The Field Experiments Website. [Downloadable!]
  2. Ping Zhang, 2009. "Characterization of Pure Strategy Equilibria in Uniform Price IPO Auctions," Discussion Papers 2009-05, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham. [Downloadable!]
  3. Rafael Romeu & Lawrence Ausubel, 2005. "Bidder Participation and Information in Currency Auctions," IMF Working Papers 05/157, International Monetary Fund. [Downloadable!]
  4. Orly Sade & Charles Schnitzlein & Jaime F. Zender, 2004. "Competition and Cooperation in Divisible Good Auctions: An Experimental Examination," Working Papers 2004.15, Fondazione Eni Enrico Mattei. [Downloadable!]
  5. 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!]
  6. Marco LiCalzi & Alessandro Pavan, 2003. "Tilting the Supply Schedule to Enhance Competition in Uniform-Price Auctions," Working Papers 2003.22, Fondazione Eni Enrico Mattei. [Downloadable!]
    Other versions:
  7. Vaihekoski, Mika, 2008. "History of finance research and education in Finland: the first thirty years," Research Discussion Papers 18/2008, Bank of Finland. [Downloadable!]
  8. Bourjade, Sylvain, 2003. "Strategic Price Discounting and Rationing in Uniform Price Auctions
    [Rationing as a Strategic Tool in Uniform Price Auctions]    ," MPRA Paper 7260, University Library of Munich, Germany, revised Oct 2007. [Downloadable!]
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