Working Paper: CEPR ID: DP3586
Authors: Matti Keloharju; Kjell G. Nyborg; Kristian Rydqvist
Abstract: We study uniform price auctions using a dataset that includes individual bidders' demand schedules in Finnish Treasury auctions during the period 1992-99. Average underpricing amounts to 0.041% of face value. Theory suggests that underpricing may result from monopsonistic market power. We develop and test robust implications from this theory and find that it has little support in the data. For example, bidders' individual demand functions do not respond to increased competition in the manner predicted by the theory. We also present evidence that the Finnish Treasury acts strategically, taking into account the fact that the auctions are part of a repeated game between the Treasury and the primary dealers. Empirically, the main driver behind bidder behaviour and underpricing is the volatility of bond returns. Since there is no evidence that bidders are risk averse, this suggests that private information and the winner's curse may play an important role in these auctions.
Keywords: demand functions; market power; multiunit auctions; seller behaviour; supply uncertainty; treasury auctions; underpricing; uniform price
JEL Codes: D44; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| average underpricing amounts to 0.041 of face value (G12) | bidders may exercise market power (D44) |
| increased competition (L13) | bidders' individual demand functions do not respond (D44) |
| increased volatility of bond returns (G12) | bid shading increases (D44) |
| increased volatility of bond returns (G12) | underpricing increases (D49) |
| private information and the winner's curse (D44) | bidder behavior (D44) |
| Finnish treasury's strategic behavior (E63) | bidder behavior (D44) |