The performance of the Eurosystem's fixed rate tenders since 2004: Theory and evidence

Christian Ewerhart, Nuno Cassola and Natacha Valla
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Nuno Cassola: European Central Bank

No 10-35, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Despite the possibility of overbidding, the Eurosystem has con- tinued using the fixed rate tender in its liquidity management. We document this fact for liquidity-absorbing fine-tuning operations, the USD term auc- tion facility, and EUR/CHF foreign exchange swaps. The mechanism is then studied in an auction-theoretic setting with privately known declining marginal valuations. An equilibrium exists even when bids are costless and the allotment is pre-announced. In this equilibrium, the extent of strate- gic overbidding is limited, and there is a bound below which the allotment quota never falls. In an extension with adaptive expectations, temporarily elevated overbidding factors quickly return to equilibrium levels.

Keywords: Eurosystem; Fixed rate tender; Overbidding; Existence of Bayesian Nash equilibrium; Dynamics; Efficiency (search for similar items in EconPapers)
JEL-codes: C72 D44 E58 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2010-08
New Economics Papers: this item is included in nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1035

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