Strategic Behavior and Underpricing in Uniform Price Auctions: Evidence from Finnish Treasury Auctions

Abstract

We contribute to the debate on the optimal design of multiunit auctions by developing and testing robust implications of the leading theory of uniform price auctions on the bid distributions submitted by individual bidders. The theory, which emphasizes market power, has little support in a data set of Finnish Treasury auctions. A reason may be that the Treasury acts strategically by determining supply after observing bids, apparently treating the auctions as a repeated game between itself and primary dealers. Bidder behavior and underpricing react to the volatility of bond returns in a way that suggests bidders adjust for the winner's curse. Copyright 2005 by The American Finance Association.

Price volatility in the secondary market and bidders’ heterogeneous behavior in Spanish Treasury auctions

“…On average, daily volatility is 0.22 %, somewhat lower to the estimates that Nyborg et al (2002) report for Swedish bonds, 0.28 % over the period from 1990 to 1994 and Keloharju et al (2005) report for Finnish bonds, 0.36 %, over the period from 1992 to 1999. Both of them estimate ARCH (2) models, pooling cross-section and time-series data, that is, they estimate one model for all bonds, while we estimate 16 models, one for each ISIN code in our sample.…”

“…14 For discriminatory auctions, Rocholl (2006) reports for Germany a discount that increases with duration, ranging from 0.076 to 0.149, while Nyborg et al (2002) report for Swedish bonds with duration between 5-and 8-year discounts that range from 0.252 to 0.478. For uniform auctions, Keloharju et al (2005) reports for Finnish Treasury bond auctions a positive and significant discount of 0.081. The negativity of discount could be explained either by overbidding or by the V -effect.…”

“…Following Keloharju et al (2005), we assume that bond returns follow a random walk with constant drift a,…”

“…Therefore, the theoretical demands from the models should be viewed only as an approximation. As in Keloharju et al (2005), we compute a number of summary statistics of individual demands and auction performance for the theoretical demands, which we compare with those that bidders actually submit.…”

“…Most of them use common value models. Keloharju et al (2005) investigates how bidder behavior and bid shading responds to secondary market volatility for uniform Finnish Treasury auctions. They test the empirical predictions of multi-unit common value models without private information, and therefore, they are not able to obtain implications on bidders' heterogeneous behavior in a given auction.…”