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The performance of the Eurosystem's fixed rate tenders since 2004: Theory and evidence

Author

Listed:
  • Christian EWERHART

    (University of Zurich)

  • Nuno CASSOLA

    (European Central Bank)

  • Natacha VALLA

    (Goldman Sachs)

Abstract

Despite the possibility of overbidding, the Eurosystem has con- tinued using the fixed rate tender in its liquidity management. We document this fact for liquidity-absorbing fine-tuning operations, the USD term auc- tion facility, and EUR/CHF foreign exchange swaps. The mechanism is then studied in an auction-theoretic setting with privately known declining marginal valuations. An equilibrium exists even when bids are costless and the allotment is pre-announced. In this equilibrium, the extent of strate- gic overbidding is limited, and there is a bound below which the allotment quota never falls. In an extension with adaptive expectations, temporarily elevated overbidding factors quickly return to equilibrium levels.

Suggested Citation

  • Christian EWERHART & Nuno CASSOLA & Natacha VALLA, 2010. "The performance of the Eurosystem's fixed rate tenders since 2004: Theory and evidence," Swiss Finance Institute Research Paper Series 10-35, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1035
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    More about this item

    Keywords

    Eurosystem; Fixed rate tender; Overbidding; Existence of Bayesian Nash equilibrium; Dynamics; Efficiency;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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