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Liquidity Shocks, Market Maker Turnover, and Bidding Behavior in Treasury Auctions

Listed author(s):
  • Martín Gonzalez-Eiras

    (Department of Economics, University of Copenhagen)

  • Jesper Rüdiger

    (Department of Economics, University of Copenhagen)

We use bid data from Argentinian Treasury bill auctions from 1996 to 2000 to study how banks' balance sheet and past performance a ect bidding behavior. Exploiting variation in regulations for market making activity we show that when banks fear losing their market maker status, they bid more aggressively. They also bid more aggressively for existing securities that are reissued when the regulation tightens the requirements for secondary market participation. Consistent with regulations which imply that auctioned securities are not a prime source of liquidity, we find that banks which face liquidity needs bid less aggressively for them. A novel implication of our results is that in institutional settings that feature turnover of market makers, bidding behavior should be modeled in a dynamic setting. We introduce a dynamic model and show that static estimates over-predict true valuations when market makers may lose their status.

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File URL: http://www.econ.ku.dk/english/research/publications/wp/dp_2017/1713.pdf
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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 17-13.

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Length: 25 pages
Date of creation: 21 Aug 2017
Handle: RePEc:kud:kuiedp:1713
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Web page: http://www.econ.ku.dk
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  1. Emmanuel Guerre & Isabelle Perrigne & Quang Vuong, 2000. "Optimal Nonparametric Estimation of First-Price Auctions," Econometrica, Econometric Society, vol. 68(3), pages 525-574, May.
  2. Jakub Kastl, 2011. "Discrete Bids and Empirical Inference in Divisible Good Auctions," Review of Economic Studies, Oxford University Press, vol. 78(3), pages 974-1014.
  3. Ali Hortaçsu & Jakub Kastl, 2012. "Valuing Dealers' Informational Advantage: A Study of Canadian Treasury Auctions," Econometrica, Econometric Society, vol. 80(6), pages 2511-2542, November.
  4. Robert Wilson, 1979. "Auctions of Shares," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 675-689.
  5. Martin Gonzalez Eiras, 2003. "Bank's Liquidity Demand in the Presence of a Lender of Last Resort," Working Papers 61, Universidad de San Andres, Departamento de Economia, revised Sep 2003.
  6. Ali Hortaçsu & David McAdams, 2010. "Mechanism Choice and Strategic Bidding in Divisible Good Auctions: An Empirical Analysis of the Turkish Treasury Auction Market," Journal of Political Economy, University of Chicago Press, vol. 118(5), pages 833-865.
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