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Bidding in fixed rate tenders: theory and experience with the ECB tenders

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  • Välimäki, Tuomas

    ()
    (Bank of Finland Research)

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    Abstract

    This paper presents a model of the optimal bidding behaviour of a single bank in the context of fixed rate liquidity tenders. Banks’ bidding is shown to depend crucially on the central bank’s liquidity policy as regards tender allotments. The paper also analyses ECB liquidity policy in terms of the model. The ECB, while applying fixed rate tenders, appears to have been attempting stabilise the market interest rate at a level close to the main refinancing rate. However, this aim was at least partially overridden by that of stabilising total money market liquidity over the course of the reserve maintenance period – even more so when banks were expecting the ECB to raise the main refinancing rate in the near future. The banks’ aggregate bids increased considerably during the period of fixed rate tenders. This was seen to result mainly from profit opportunities associated with a positive spread between market interest rate and main refinancing rate. The positive spread resulted from the combination of expectations of an interest rate hike and liquidity-oriented allotment policy.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0201.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 1/2002.

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    Length: 48 pages
    Date of creation: 18 Feb 2002
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2002_001

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    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
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    Related research

    Keywords: bidding; money market tenders; liquidity policy; central bank operating framework;

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    References

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    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.:
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    1. Juan Ayuso & Rafael Repullo, 2000. "A Model of the Open Market Operations of the European Central Bank," Banco de Espa�a Working Papers 0016, Banco de Espa�a.
    2. Ayuso, J. & Repullo, R., 2000. "A Model of the Open Market Operations of the European Central Bank," Papers 0011, Centro de Estudios Monetarios Y Financieros-.
    3. Bindseil, Ulrich & Seitz, Franz, 2001. "The supply and demand for Eurosystem deposits - The first 18 months," Working Paper Series 0044, European Central Bank.
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    Cited by:
    1. Karlo Kauko, 2004. "Links between securities settlement systems: An oligopoly theoretic approach," Industrial Organization 0405003, EconWPA.
    2. Peik Granlund, 2004. "Bank exit legislation in US, EU and Japanese financial centres," Finance 0405015, EconWPA.
    3. Keloharju, Matti & Malkamäki, Markku & Nyborg, Kjell G. & Rydqvist, Kristian, 2002. "A descriptive analysis of the Finnish treasury bond market 1991–1999," Research Discussion Papers 16/2002, Bank of Finland.

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