Price elasticity of demand and risk-bearing capacity in sovereign bond auctions

José Miguel Cardoso da Costa and Rui Albuquerque
Authors registered in the RePEc Author Service: Jose Afonso Faias

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: The paper uses bids submitted by primary dealer banks at auctions of sovereign bonds to quantify the price elasticity of demand. The price elasticity of demand correlates strongly with the volatility of returns of the same bonds traded in the secondary market but only weakly with their bid-ask spread. The price elasticity of demand predicts same-bond post-auction returns in the secondary market, even after controlling for pre-auction volatility. The evidence suggests that the price elasticity of demand is associated with the magnitude of price pressure in the secondary market around auction days, and proxies for primary dealer risk-bearing capacity.

JEL-codes: G12 G20 G24 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ban and nep-des
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Working Paper: Price elasticity of demand and risk-bearing capacity in sovereign bond auctions (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w202302

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