Working Paper: CEPR ID: DP17095
Authors: Rui Albuquerque; Jos Costa; Jose Faias
Abstract: The paper uses bids submitted by primary dealer banks at auctions of sovereign bonds to quantify the price elasticity of demand. The price elasticity of demand correlates strongly with the volatility of returns of the same bonds traded in the secondary market but only weakly with their bid-ask spread. It predicts same-bond post-auction returns in the secondary market, even after controlling for pre-auction volatility. The evidence suggests that the price elasticity of demand is associated with the magnitude of price pressure in the secondary market around auction days and proxies for primary dealer risk-bearing capacity.
Keywords: demand elasticity; risk-bearing capacity; price pressure; market liquidity; sovereign bond auctions; supply shocks; european central bank
JEL Codes: G12; G20; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher price elasticity of demand (D12) | Lower volatility of returns in the secondary market (G19) |
| Higher price elasticity of demand (D12) | Less price pressure around auction days (D44) |
| Low elasticity (D11) | Significant price drop prior to auctions (D44) |
| Decrease in elasticity by one standard deviation (H31) | 11 basis point increase in bond prices after five days (G12) |
| Price elasticity of demand (D12) | Predicts post-auction returns (D44) |
| Price elasticity of demand (D12) | Risk-bearing capacity (G32) |