Price Effects of Sovereign Debt Auctions in the Euro-Zone: The Role of the Crisis

41 Pages Posted: 18 Sep 2013

See all articles by Roel M. W. J. Beetsma

Roel M. W. J. Beetsma

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); European Commission; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Tinbergen Institute; Netspar

Massimo Giuliodori

University of Amsterdam - Faculty of Economics & Econometrics (FEE); Tinbergen Institute

Frank De Jong

Tilburg University - Department of Finance

Daniel Widijanto

BNG Vermogensbeheer

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Date Written: September 17, 2013

Abstract

Exploring the period since the inception of the euro, we show that secondary-market yields on Italian public debt increase in anticipation of auctions of new issues and decrease after the auction, while no or a smaller such effect is present for German public debt. However, these yield movements on the Italian debt are largely confined to the period of the crisis since mid-2007. We also find that there is some tendency of the yield movements to be larger when the demand for the new issue is smaller relative to its supply. Our results are consistent with a framework in which a small group of primary dealers require compensation for inventory risk and this compensation needs to be higher when market uncertainty is larger. We also find that the secondary-market behaviour of series with a maturity close to the auctioned series, but for which there is no auction, is very similar to the secondary-market behaviour of the auctioned series. These findings support an explanation of yield movements based on the behaviour of primary dealers with limited risk-bearing capacity.

Keywords: public debt, auctions, yield movements, euro-zone, crisis, Italy, Germany, event study, primary dealers, bid-to-cover ratio

JEL Classification: G12, G18

Suggested Citation

Beetsma, Roel M. W. J. and Giuliodori, Massimo and De Jong, Frank and Widijanto, Daniel, Price Effects of Sovereign Debt Auctions in the Euro-Zone: The Role of the Crisis (September 17, 2013). Available at SSRN: https://ssrn.com/abstract=2326945 or http://dx.doi.org/10.2139/ssrn.2326945

Roel M. W. J. Beetsma

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM) ( email )

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Massimo Giuliodori

University of Amsterdam - Faculty of Economics & Econometrics (FEE) ( email )

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Tinbergen Institute ( email )

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Frank De Jong (Contact Author)

Tilburg University - Department of Finance ( email )

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Daniel Widijanto

BNG Vermogensbeheer ( email )

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2514 AA The Hague
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