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

24 Pages Posted: 24 Aug 2017

See all articles by Martin Gonzalez-Eiras

Martin Gonzalez-Eiras

University of Copenhagen

Jesper Rüdiger

Universidad Carlos III de Madrid - Department of Business Administration

Date Written: August 21, 2017

Abstract

We use bid data from Argentinian Treasury bill auctions from 1996 to 2000 to study how banks' balance sheet and past performance affect 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

JEL Classification: D44; G12; G21; L10; L13

Suggested Citation

Gonzalez-Eiras, Martin and Rüdiger, Jesper, Liquidity Shocks, Market Maker Turnover, and Bidding Behavior in Treasury Auctions (August 21, 2017). Available at SSRN: https://ssrn.com/abstract=3023198 or http://dx.doi.org/10.2139/ssrn.3023198

Martin Gonzalez-Eiras (Contact Author)

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

Jesper Rüdiger

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

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