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Bidder Participation and Information in Currency Auctions

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  • Rafael Romeu
  • Lawrence Ausubel
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    Abstract

    This paper studies the participation and performance of sophisticated versus unsophisticated auction participants in an environment with numerous bidders, uncertainty, and asymmetric information. We examine multi-unit, pay-as-bid, currency auctions conducted by the Central Bank of Venezuela. We find that sophisticated bidders outperform their less sophisticated rivals during periods of high volatility, apparently as a result of their superior informationgathering ability. The result is consistent across both quantity (sophisticated bidders win more market share) and price (sophisticated bidders pay lower premiums). The result is consistent with the view that a pay-as-bid auction format may be detrimental to participation by less-informed bidders.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/157.

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    Length: 46
    Date of creation: 01 Aug 2005
    Date of revision:
    Handle: RePEc:imf:imfwpa:05/157

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    Related research

    Keywords: Foreign exchange auctions; bidders; bidder; derivative; bids; winning bid; winning bidders; bond; emerging market bond; market bond; bond index; bid price; stock exchange; bidders ? bids; equity markets; new york stock exchange; financial markets; financial instruments; forward contract; asset markets; equity shares; tenders;

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    References

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    1. Goldberg, Linda & Tenorio, Rafael, 1997. "Strategic trading in a two-sided foreign exchange auction1," Journal of International Economics, Elsevier, Elsevier, vol. 42(3-4), pages 299-326, May.
    2. Bindseil, Ulrich & Nyborg, Kjell G & Strebulaev, Ilya, 2004. "Bidding and Performance in Repo Auctions: Evidence from ECB Open Market Operations," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4367, C.E.P.R. Discussion Papers.
    3. Martin D.D. Evans & Richard K. Lyons, 1999. "Order Flow and Exchange Rate Dynamics," NBER Working Papers 7317, National Bureau of Economic Research, Inc.
    4. Matti Keloharju & Kjell G. Nyborg & Kristian Rydqvist, 2005. "Strategic Behavior and Underpricing in Uniform Price Auctions: Evidence from Finnish Treasury Auctions," Journal of Finance, American Finance Association, American Finance Association, vol. 60(4), pages 1865-1902, 08.
    5. Tenorio, Rafael, 1993. "Revenue Equivalence and Bidding Behavior in a Multi-unit Auction Market: An Empirical Analysis," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 302-14, May.
    6. Peter Cramton, 2002. "Spectrum Auctions," Papers of Peter Cramton 01hte, University of Maryland, Department of Economics - Peter Cramton, revised 16 Jul 2001.
    7. Klemperer, Paul, 1999. "Auction Theory: a Guide to the Literature," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2163, C.E.P.R. Discussion Papers.
    8. Rafael Romeu, 2003. "An Intraday Pricing Model of Foreign Exchange Markets," IMF Working Papers 03/115, International Monetary Fund.
    9. Robert Alan Feldman & Vincent Reinhart, 1995. "Flexible Estimation of Demand Schedules and Revenue Under Different Auction Formats," IMF Working Papers 95/116, International Monetary Fund.
    10. James J. Heckman, 1977. "Dummy Endogenous Variables in a Simultaneous Equation System," NBER Working Papers 0177, National Bureau of Economic Research, Inc.
    11. Wilson, Robert, 1979. "Auctions of Shares," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(4), pages 675-89, November.
    12. Back, Kerry & Zender, Jaime F., 2001. "Auctions of divisible goods with endogenous supply," Economics Letters, Elsevier, Elsevier, vol. 73(1), pages 29-34, October.
    13. Tenorio, Rafael, 1997. "Some evidence on strategic quantity reduction in multiple unit auctions," Economics Letters, Elsevier, Elsevier, vol. 55(2), pages 209-213, August.
    14. 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, University of Chicago Press, vol. 110(2), pages 394-424, April.
    15. Bagwell, Laurie Simon, 1992. " Dutch Auction Repurchases: An Analysis of Shareholder Heterogeneity," Journal of Finance, American Finance Association, American Finance Association, vol. 47(1), pages 71-105, March.
    16. Richard K. Lyons, 2006. "The Microstructure Approach to Exchange Rates," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 026262205x, December.
    17. Lawrence M. Ausubel, 2004. "An Efficient Ascending-Bid Auction for Multiple Objects," American Economic Review, American Economic Association, American Economic Association, vol. 94(5), pages 1452-1475, December.
    18. Ali Hortacsu & Samita Sareen, 2005. "Order Flow and the Formation of Dealer Bids: Information Flows and Strategic Behavior in the Government of Canada Securities Auctions," NBER Working Papers 11116, National Bureau of Economic Research, Inc.
    19. Lawrence M. Ausubel & Paul Milgrom, 2002. "Ascending Auctions with Package Bidding," Working Papers, Stanford University, Department of Economics 02004, Stanford University, Department of Economics.
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