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Declining Valuations And Equilibrium Bidding In Central Bank Refinancing Operations

Author

Listed:
  • Christian Ewerhart

    (University of Zurich)

  • Nuno Cassola

    (European Central Bank)

  • Natacha Valla

    (Banque de France)

Abstract

Among the most puzzling observations for the euro money market are the bid shading in the weekly refinancing operations and the development of interest rate spreads. To explain these observations, we consider a standard divisible-good auction à la Klemperer and Meyer (1989) with uniform or discriminatory pricing, and place it in the context of a secondary market for interbank credit. The analysis links the observations for the euro area to the endogenous choice of collateral in credit transactions. We also discuss the Eurosystem’s apparent preference for the discriminatory pricing rule.

Suggested Citation

  • Christian Ewerhart & Nuno Cassola & Natacha Valla, 2007. "Declining Valuations And Equilibrium Bidding In Central Bank Refinancing Operations," Swiss Finance Institute Research Paper Series 07-22, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp0722
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    Cited by:

    1. Vogel, Edgar, 2014. "MRO bidding in the presence of LTROs: an empirical analysis of the pre-crisis period," Working Paper Series 1753, European Central Bank.
    2. Nuno Cassola & Claudio Morana, 2008. "Modeling Short-Term Interest Rate Spreads in the Euro Money Market," International Journal of Central Banking, International Journal of Central Banking, vol. 4(4), pages 1-37, December.
    3. Nuno Cassola & Christian Ewerhart & Claudio Morana, 2007. "Structural econometric approach to bidding in the main refinancing operations of the Eurosystem," Journal of Financial Transformation, Capco Institute, vol. 19, pages 81-90.
    4. Ewerhart, Christian & Cassola, Nuno & Valla, Natacha, 2012. "Overbidding in fixed rate tenders: The role of exposure risk," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 539-549.
    5. Vives, Xavier, 2011. "Endogenous public information and welfare," IESE Research Papers D/925, IESE Business School.
    6. Xavier Vives, 2011. "Strategic Supply Function Competition With Private Information," Econometrica, Econometric Society, vol. 79(6), pages 1919-1966, November.
    7. Schnatz, Bernd, 2006. "Is reversion to PPP in euro exchange rates non-linear?," Working Paper Series 682, European Central Bank.
    8. Nuno Cassola & Ali Hortaçsu & Jakub Kastl, 2013. "The 2007 Subprime Market Crisis Through the Lens of European Central Bank Auctions for Short‐Term Funds," Econometrica, Econometric Society, vol. 81(4), pages 1309-1345, July.
    9. Bayona, Anna & Manzano, Carolina, 2024. "Competition in schedules with cursed traders," Journal of Economic Theory, Elsevier, vol. 222(C).
    10. Vives, Xavier, 2011. "A Large-Market Rational Expectations Equilibrium Model," CEPR Discussion Papers 8426, C.E.P.R. Discussion Papers.
    11. Xavier Vives, 2010. "Asset Auctions, Information, and Liquidity," Journal of the European Economic Association, MIT Press, vol. 8(2-3), pages 467-477, 04-05.
    12. Manzano, Carolina & Vives, Xavier, 2021. "Market power and welfare in asymmetric divisible good auctions," Theoretical Economics, Econometric Society, vol. 16(3), July.
    13. Ollikka, Kimmo & Tukiainen, Janne, 2013. "Central bank liquidity auction mechanism design and the interbank market," Research Discussion Papers 21/2013, Bank of Finland.
    14. Xavier Vives, 2014. "On The Possibility Of Informationally Efficient Markets," Journal of the European Economic Association, European Economic Association, vol. 12(5), pages 1200-1239, October.
    15. Vergote, Olivier & Sugo, Tomohiro, 2020. "Who takes the ECB’s targeted funding?," Working Paper Series 2439, European Central Bank.
    16. Ollikka, Kimmo & Tukiainen, Janne, 2013. "Central bank liquidity auction mechanism design and the interbank market," Bank of Finland Research Discussion Papers 21/2013, Bank of Finland.
    17. Jakob Korbinian Eberl, 2016. "The Collateral Framework of the Eurosystem and Its Fiscal Implications," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 69, July.
    18. Pycia, Marek & Woodward, Kyle, 2021. "Auctions of Homogeneous Goods: A Case for Pay-as-Bid," CEPR Discussion Papers 15656, C.E.P.R. Discussion Papers.
    19. Nikolaou, Kleopatra, 2009. "Liquidity (risk) concepts: definitions and interactions," Working Paper Series 1008, European Central Bank.
    20. Di Xiao & Andreas Krause, 2022. "Bank demand for central bank liquidity and its impact on interbank markets," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 17(3), pages 639-679, July.
    21. Xavier Vives, 2017. "Endogenous Public Information and Welfare in Market Games," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(2), pages 935-963.

    More about this item

    Keywords

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    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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