Behavioral Biases of Dealers in U.S. Treasury Auctions
AbstractThis 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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Bibliographic InfoPaper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2004.143.
Date of creation: Dec 2004
Date of revision:
Treasury auctions; Behavioral finance;
Find related papers by JEL classification:
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
- H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-01-16 (All new papers)
- NEP-CFN-2005-01-24 (Corporate Finance)
- NEP-EVO-2005-01-17 (Evolutionary Economics)
- NEP-FMK-2005-04-15 (Financial Markets)
- NEP-MIC-2005-01-24 (Microeconomics)
- NEP-PBE-2005-01-24 (Public Economics)
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