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Bidding behaviour in the ECB’s main refinancing operations during the financial crisis

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  • Eisenschmidt, Jens
  • Hirsch, Astrid
  • Linzert, Tobias

Abstract

Liquidity provision through its repo auctions has been one of the main instruments of the European Central Bank (ECB) to address the recent tensions in financial markets since summer 2007. In this paper, we analyse banks’ bidding behaviour in the ECB’s main refinancing operations (MROs) during the ongoing turmoil in money and financial markets. We employ a unique data set comprising repo auctions from March 2004 to October 2008 with bidding data from 877 counterparties. We find that increased bid rates during the turmoil can be explained by, inter alia, the increased individual refinancing motive, the increased attractiveness of the ECB’s tender operations due to its collateral framework and banks’ bidding more aggressively, i.e. at higher rates to avoid being rationed at the marginal rate in times of increased liquidity uncertainty. JEL Classification: E52, D44, C33, C34

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1052.

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Date of creation: May 2009
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Handle: RePEc:ecb:ecbwps:20091052

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Keywords: Bidding Behavior; Central Bank Auctions; Financial Market Turmoil; monetary policy instruments; Panel Sample Selection Model;

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  1. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1089-1122, September.
  2. Ben Craig & Falko Fecht, 2006. "The Eurosystem money market auctions: a banking perspective," Working Paper 0506, Federal Reserve Bank of Cleveland.
  3. Michael B. Gordy, 1999. "Hedging Winner'S Curse With Multiple Bids: Evidence From The Portuguese Treasury Bill Auction," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 448-465, August.
  4. Mireia Jofre-Bonet & Martin Pesendorfer, 2003. "Estimation of a Dynamic Auction Game," Econometrica, Econometric Society, Econometric Society, vol. 71(5), pages 1443-1489, 09.
  5. Giuseppe Bruno & Ernesto Maurizio Ordine & Antonio Scalia, 2005. "BanksÂ’ participation in the Eurosystem auctions and money market integration," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 562, Bank of Italy, Economic Research and International Relations Area.
  6. Nautz, Dieter, 1998. "Banks' demand for reserves when future monetary policy is uncertain," Journal of Monetary Economics, Elsevier, Elsevier, vol. 42(1), pages 161-183, June.
  7. Dieter Nautz & Jörg Oechssler, 2001. "The Repo Auctions of the European Central Bank and the Vanishing Quota Puzzle," Bonn Econ Discussion Papers, University of Bonn, Germany bgse9_2001, University of Bonn, Germany.
  8. Fecht, Falko & Nyborg, Kjell G & Rocholl, Jörg, 2010. "The Price of Liquidity: Bank Characteristics and Market Conditions," CEPR Discussion Papers 7794, C.E.P.R. Discussion Papers.
  9. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, Econometric Society, vol. 47(1), pages 153-61, January.
  10. Kjell G. Nyborg, 2004. "Multiple Unit Auctions and Short Squeezes," Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 545-580.
  11. Ricardo J. Caballero & Arvind Krishnamurthy, 2008. "Collective Risk Management in a Flight to Quality Episode," Journal of Finance, American Finance Association, American Finance Association, vol. 63(5), pages 2195-2230, October.
  12. Välimäki , Tuomas, 2006. "Why the marginal MRO rate exceeds the ECB policy rate?," Research Discussion Papers 20/2006, Bank of Finland.
  13. Linzert, Tobias & Nautz, Dieter & Bindseil, Ulrich, 2004. "The longer term refinancing operations of the ECB," Working Paper Series, European Central Bank 0359, European Central Bank.
  14. Linzert, Tobias & Nautz, Dieter & Breitung, Jorg, 2006. "Bidder behavior in central bank repo auctions: Evidence from the Bundesbank," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 16(3), pages 215-230, July.
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Citations

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Cited by:
  1. Yasuo Hirose & Shinsuke Ohyama, 2010. "Identifying the Effect of the Bank of Japan's Liquidity Facilities: The Case of Commercial Paper Operations During the Financial Turmoil," International Finance, Wiley Blackwell, vol. 13(3), pages 461-483, Winter.
  2. Kraenzlin, Sébastien & Schlegel, Martin, 2012. "Bidding behavior in the SNB’s repo auctions," Journal of International Money and Finance, Elsevier, Elsevier, vol. 31(2), pages 170-188.
  3. Pérez-Quirós, Gabriel & Rodriguez Mendizabal, Hugo, 2010. "Asymmetric Standing Facilities: An Unexploited Monetary Policy Tool," CEPR Discussion Papers 7789, C.E.P.R. Discussion Papers.
  4. 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, Econometric Society, vol. 81(4), pages 1309-1345, 07.
  5. Bucher, Monika & Hauck, Achim & Neyer, Ulrike, 2014. "Frictions in the interbank market and uncertain liquidity needs: Implications for monetary policy implementation," DICE Discussion Papers 134 [rev.], Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  6. Paolo Fegatelli, 2010. "The role of collateral requirements in the crisis: one tool for two objectives?," BCL working papers 44, Central Bank of Luxembourg.
  7. Abbassi, Puriya & Fecht, Falko & Weber, Patrick, 2013. "How stressed are banks in the interbank market?," Discussion Papers 40/2013, Deutsche Bundesbank, Research Centre.
  8. Jason Allen & Ali Hortaçsu & Jakub Kastl, 2011. "Analyzing Default Risk and Liquidity Demand during a Financial Crisis: The Case of Canada," Working Papers 11-17, Bank of Canada.
  9. Bucher, Monika & Hauck, Achim & Neyer, Ulrike, 2014. "Frictions in the interbank market and uncertain liquidity needs: Implications for monetary policy implementation," DICE Discussion Papers 134, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

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