IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Auction failures and the market for auction rate securities

  • McConnell, John J.
  • Saretto, Alessio
Registered author(s):

    The market for auction rate securities (ARS) made headlines during the second week of February 2008 when auctions at which the bonds' interest rates reset experienced a wave of "failures." Contrary to headlines that attribute the failures to a "frozen" market or investors' "irrationality," we find that (1) even at their height, less than 50% of ARS experienced auction failures, (2) the likelihood of auction failure was directly related to the level of the bonds' "maximum auction rates," (3) the implied market clearing yields of bonds with failed auctions were significantly above their maximum auction rates, and (4) ARS yields were generally higher than yields of various cash equivalent investment alternatives. We infer that investors priced the possibility of auctions failures into ARS yields and rationally declined to bid for bonds for which required market yields exceeded their maximum auction rates.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/B6VBX-4YC1K8W-2/2/8886552e118b7cb985d6c36b71fd15a9
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 97 (2010)
    Issue (Month): 3 (September)
    Pages: 451-469

    as
    in new window

    Handle: RePEc:eee:jfinec:v:97:y:2010:i:3:p:451-469
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

    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.:

    as in new window
    1. Lasse Heje Pederson & Markus K Brunnermeier, 2007. "Market Liquidity and Funding Liquidity," FMG Discussion Papers dp580, Financial Markets Group.
    2. Chris Downing & Frank Zhang, 2004. "Trading Activity and Price Volatility in the Municipal Bond Market," Journal of Finance, American Finance Association, vol. 59(2), pages 899-931, 04.
    3. Buser, Stephen A. & Hess, Patrick J., 1986. "Empirical determinants of the relative yields on taxable and tax-exempt securities," Journal of Financial Economics, Elsevier, vol. 17(2), pages 335-355, December.
    4. Laura E. Kodres & Matthew Pritsker, 2002. "A Rational Expectations Model of Financial Contagion," Journal of Finance, American Finance Association, vol. 57(2), pages 769-799, 04.
    5. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1980. " An Analysis of Variable Rate Loan Contracts," Journal of Finance, American Finance Association, vol. 35(2), pages 389-403, May.
    6. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
    7. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
    8. Andrew Ang & Vineer Bhansali & Yuhang Xing, 2010. "Taxes on Tax-Exempt Bonds," Journal of Finance, American Finance Association, vol. 65(2), pages 565-601, 04.
    9. Ramaswamy, Krishna & Sundaresan, Suresh M., 1986. "The valuation of floating-rate instruments : Theory and evidence," Journal of Financial Economics, Elsevier, vol. 17(2), pages 251-272, December.
    10. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
    11. Driessen, J.J.A.G. & Klaassen, P. & Melenberg, B., 2000. "The Performance of Multi-Factor Term Structure Models for Pricing and Hedging Caps and Swaptions," Discussion Paper 2000-93, Tilburg University, Center for Economic Research.
    12. Francis A. Longstaff, 2001. "The Relative Valuation of Caps and Swaptions: Theory and Empirical Evidence," Journal of Finance, American Finance Association, vol. 56(6), pages 2067-2109, December.
    13. Ravi Jagannathan & Andrew Kaplin & Steve Guoqiang Sun, 2001. "An Evaluation of Multi-Factor CIR Models Using LIBOR, Swap Rates, and Cap and Swaption Prices," NBER Working Papers 8682, National Bureau of Economic Research, Inc.
    14. Qiang Dai & Kenneth Singleton, 2003. "Term Structure Dynamics in Theory and Reality," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 631-678, July.
    15. Skelton, Jeffrey L, 1983. " Relative Risk in Municipal and Corporate Debt," Journal of Finance, American Finance Association, vol. 38(2), pages 625-34, May.
    16. Franklin Allen & Douglas Gale, 2003. "Financial Intermediaries and Markets," Center for Financial Institutions Working Papers 00-44, Wharton School Center for Financial Institutions, University of Pennsylvania.
    17. Richard Green & Burton Hollifield & Norman Schurhoff, . "Dealer Intermediation and Price Behavior in the Aftermarket for New Bond Issues," GSIA Working Papers 2005-E56, Carnegie Mellon University, Tepper School of Business.
    18. Albert S. Kyle, 2001. "Contagion as a Wealth Effect," Journal of Finance, American Finance Association, vol. 56(4), pages 1401-1440, 08.
    19. Bing Han, 2007. "Stochastic Volatilities and Correlations of Bond Yields," Journal of Finance, American Finance Association, vol. 62(3), pages 1491-1524, 06.
    20. Nobuhiro Kiyotaki & John Moore, 2002. "Evil Is the Root of All Money," American Economic Review, American Economic Association, vol. 92(2), pages 62-66, May.
    21. Benson, Earl D. & Kidwell, David S. & Koch, Timothy W. & Rogowski, Robert J., 1981. "Systematic Variation in Yield Spreads for Tax-Exempt General Obligation Bonds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(05), pages 685-702, December.
    22. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
    23. Vikram Nanda & Rajdeep Singh, 2004. "Bond Insurance: What Is Special About Munis?," Journal of Finance, American Finance Association, vol. 59(5), pages 2253-2280, October.
    24. Trzcinka, Charles A, 1982. " The Pricing of Tax-Exempt Bonds and the Miller Hypothesis," Journal of Finance, American Finance Association, vol. 37(4), pages 907-23, September.
    25. Kau, James B, et al, 1993. "Option Theory and Floating-Rate Securities with a Comparison of Adjustable- and Fixed-Rate Mortgages," The Journal of Business, University of Chicago Press, vol. 66(4), pages 595-618, October.
    26. Jorion, Philippe & Zhang, Gaiyan, 2007. "Good and bad credit contagion: Evidence from credit default swaps," Journal of Financial Economics, Elsevier, vol. 84(3), pages 860-883, June.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:97:y:2010:i:3:p:451-469. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.