Working Paper: CEPR ID: DP9659
Authors: Roel Beetsma; Frank de Jong; Massimo Giuliodori; Daniel Widijanto
Abstract: Exploring the period since the inception of the euro, we show that secondary-market yields on Italian public debt increase in anticipation of auctions of new issues and decrease after the auction, while no or a smaller such effect is present for German public debt. However, these yield movements on the Italian debt are largely confined to the period of the crisis since mid-2007. We also find that there is some tendency of the yield movements to be larger when the demand for the new issue is smaller relative to its supply. Our results are consistent with a framework in which a small group of primary dealers require compensation for inventory risk and this compensation needs to be higher when market uncertainty is larger. We also find that the secondary-market behaviour of series with a maturity close to the auctioned series, but for which there is no auction, is very similar to the secondary-market behaviour of the auctioned series. These findings support an explanation of yield movements based on the behaviour of primary dealers with limited risk-bearing capacity.
Keywords: auctions; bid-to-cover ratio; crisis; eurozone; event study; germany; italy; primary dealers; public debt; yield movements
JEL Codes: G12; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Crisis presence (H12) | Yield movements (E43) |
| Auction events (D44) | Yield movements (E43) |
| Inventory management behavior of primary dealers (G10) | Yield movements (E43) |
| Auction success (bid-to-cover ratios) (D44) | Yield changes (E43) |
| Anticipation of auctions (D44) | Secondary market yields (G12) |
| Post-auction events (D44) | Secondary market yields (G12) |
| Crisis periods (G01) | Yield movements (E43) |