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Hedging Winner's Curse with Multiple Bids: Evidence from the Portuguese Treasury Bill Auction

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  • Michael B. Gordy

    (Federal Reserve Board)

Abstract

Auctions of government securities typically permit bidders to enter multiple price-quantity bids. Despite the widespread adoption of this institutional feature and its use by bidders, the motivations behind its use and its effects on auction outcomes are not well understood theoretically and have been little explored empirically. Using bidding data from treasury bill auctions in Portugal, this paper examines how bidders use multiple bids to hedge against winner's curse. The data show that, ceteris paribus, a bidder submits a greater number of bids and disperses prices on these bids more widely when there is a greater potential for winner's curse. In particular, both these measures of bid- spreading increase with the volatility of market interest rates and the expected number of participating well-informed bidders.

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Bibliographic Info

Paper provided by EconWPA in its series Microeconomics with number 9702002.

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Length: 37 pages
Date of creation: 18 Feb 1997
Date of revision:
Handle: RePEc:wpa:wuwpmi:9702002

Note: 37 pages, Postscript (zipped and uuencoded)
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References

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  1. Wilson, Robert, 1979. "Auctions of Shares," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 675-89, November.
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Cited by:
  1. Michael B. Gordy, . "Multiple Bids in a Multiple-Unit Common Value Auction," Computing in Economics and Finance 1996 _021, Society for Computational Economics.
  2. Alvarez, Francisco & Mazon, Cristina, 2007. "Comparing the Spanish and the discriminatory auction formats: A discrete model with private information," European Journal of Operational Research, Elsevier, vol. 179(1), pages 253-266, May.
  3. Han, Bing & Longstaff, Francis A. & Merrill, Craig, 2005. "The Cherry-Picking Option in the U.S. Treasury Buyback Auctions," Working Paper Series 2004-23, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  4. Xavier Vives, 2011. "Strategic Supply Function Competition With Private Information," Econometrica, Econometric Society, vol. 79(6), pages 1919-1966, November.
  5. Eisenschmidt, Jens & Hirsch, Astrid & Linzert, Tobias, 2009. "Bidding behaviour in the ECB’s main refinancing operations during the financial crisis," Working Paper Series 1052, European Central Bank.
  6. Saikat Nandi, 1997. "Treasury auctions: what do the recent models and results tell us?," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 4-15.
  7. Klaus Abbink & Jordi Brandts & Paul Pezanis-Christou, 2002. "Auctions for Government Securities: A Laboratory Comparison of Uniform, Discriminatory and Spanish Designs," UFAE and IAE Working Papers 551.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  8. Sara Castellanos, 2001. "Mexican treasury securities primary auctions," Theory workshop papers 357966000000000025, UCLA Department of Economics.
  9. Sara G. Castellanos & Marco A. Oviedo, 2004. "Optimal Bidding in the Mexican Treasury Securities Primary Auctions: Results from a Structural Econometrics Approach," Levine's Working Paper Archive 122247000000000118, David K. Levine.
  10. Michał Krawczyk, 2009. "Demand functions in Polish Treasury auctions," Bank i Kredyt, National Bank of Poland, Economic Institute, vol. 40(4), pages 31-49.
  11. Sara Castellanos, 2001. "A New Empirical Study of the Mexican Treasury Securities Primary Auctions: Is there more underpricing?," Levine's Working Paper Archive 625018000000000206, David K. Levine.
  12. Longstaff, Francis A & Han, Bing & Merrill, Craig, 2004. "Revenue Implications of Multi-Item Multi-Unit Auction Designs: Empirical Evidence from the U.S. Treasury Buyback Auctions," University of California at Los Angeles, Anderson Graduate School of Management qt7344v866, Anderson Graduate School of Management, UCLA.
  13. Nielsen, Kurt, 2005. "Auctioning Payment Entitlements," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24566, European Association of Agricultural Economists.

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