Overbidding in Fixed Rate Tenders: The Role of Exposure Risk

43 Pages Posted: 25 Aug 2010 Last revised: 2 Jun 2011

See all articles by Christian Ewerhart

Christian Ewerhart

University of Zurich, Department of Economics

Nuno Cassola

University of Milan Bicocca - CefES; University of Lisbon - CEMAPRE

Natacha Valla

European Union - European Investment Bank; European Central Bank (ECB); Banque de France

Date Written: August 24, 2010

Abstract

The fixed rate tender is one of the main operational formats used by central banks in the implementation of their monetary policies. While academic research has largely dismissed the procedure for its tendency to encourage overbidding, central banks such as the ECB and the Bank of England have continued using it. We elaborate on this apparent conflict by considering an auction-theoretic setting with privately known declining marginal valuations. Since overbidding entails exposure risk, an equilibrium may exist even if bids are costless and the intended amount is pre-announced. In fact, rationing may occur with certainty. The equilibrium is also robust under adaptive expectations. However, the resulting allocation is typically inefficient. Empirical proxies of exposure risk are significant in both Euro and Sterling operations. Our findings have implications, in particular, for the potential re-introduction of rationing in the main refinancing operations of the Eurosystem.

Keywords: Eurosystem; Bank of England, Fixed rate tender, Overbidding, Exposure risk, Existence of equilibrium, Dynamics

JEL Classification: C72, D44, E58

Suggested Citation

Ewerhart, Christian and Cassola, Nuno and Valla, Natacha, Overbidding in Fixed Rate Tenders: The Role of Exposure Risk (August 24, 2010). Swiss Finance Institute Research Paper No. 10-35, Available at SSRN: https://ssrn.com/abstract=1664560 or http://dx.doi.org/10.2139/ssrn.1664560

Christian Ewerhart (Contact Author)

University of Zurich, Department of Economics ( email )

Schoenberggasse 1
Zurich, CH-8001
Switzerland

Nuno Cassola

University of Milan Bicocca - CefES ( email )

Milan
Italy

University of Lisbon - CEMAPRE ( email )

Lisbon
Portugal

Natacha Valla

European Union - European Investment Bank ( email )

98-100 Boulevard Konrad Adenauer
L-2950
Luxembourg

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 13440 (Phone)

Banque de France ( email )

31 rue Croix des Petits Champs
75049 Paris Cedex 01
France
+33 1 42922756 (Phone)
+33 1 42926296 (Fax)

HOME PAGE: http://www.iue.it/Personal/Researchers/valla/

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