Liquidity Shocks, Market Maker Turnover, and Bidding Behavior in Treasury Auctions

Martin Gonzalez-Eiras and Jesper Rüdiger
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Jesper Rüdiger: Department of Economics, University of Copenhagen

No 17-13, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: We use bid data from Argentinian Treasury bill auctions from 1996 to 2000 to study how banks' balance sheet and past performance a ect bidding behavior. Exploiting variation in regulations for market making activity we show that when banks fear losing their market maker status, they bid more aggressively. They also bid more aggressively for existing securities that are reissued when the regulation tightens the requirements for secondary market participation. Consistent with regulations which imply that auctioned securities are not a prime source of liquidity, we find that banks which face liquidity needs bid less aggressively for them. A novel implication of our results is that in institutional settings that feature turnover of market makers, bidding behavior should be modeled in a dynamic setting. We introduce a dynamic model and show that static estimates over-predict true valuations when market makers may lose their status.

Keywords: Treasury Auctions; Multi-unit Auctions; Structural Estimation; Bidding Behavior; Balance-sheet; Data; Market Making (search for similar items in EconPapers)
JEL-codes: D44 G12 G21 L10 L13 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2017-08-21
New Economics Papers: this item is included in nep-ban and nep-des
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