This paper provides evidence of bounded rationality by large dealers in U.S. Treasury auctions. I argue that these dealers use a heuristic of yield-space bidding which leads to biases manifested in three ways: they submit dominated bids, i.e., those that could be improved without raising the bidding price; they bid in a manner that disregards the unevenly spaced price grid; and they round bids in yield space. Consistent with bounded rationality, I show that bidders are less susceptible to bias when the cost of suboptimal bidding is high. While the literature provides substantial evidence of behavioral biases among individual investors, they are less well documented for large sophisticated institutions that are likely to be important for setting asset prices. These primary bond dealers who regularly bid for billions of dollars in Treasury bill auctions are precisely such economic agents.
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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number
2004.143.
Find related papers by JEL classification: H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
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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.:
Barberis, Nicholas & Thaler, Richard, 2003.
"A survey of behavioral finance,"
Handbook of the Economics of Finance,
in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128
Elsevier.
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