Strategic Behaviour and Underpricing in Uniform Price Auctions: Evidence from Finnish Treasury Auctions

45 Pages Posted: 19 Nov 2002

See all articles by Matti Keloharju

Matti Keloharju

Aalto University - School of Business; Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)

Kjell G. Nyborg

University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Kristian Rydqvist

State University of New York at Binghamton - School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: October 2002

Abstract

We study uniform price auctions using a dataset that includes individual bidders' demand schedules in Finnish Treasury auctions during the period 1992-99. Average underpricing amounts to 0.041% of face value. Theory suggests that underpricing may result from monopsonistic market power. We develop and test robust implications from this theory and find that it has little support in the data. For example, bidders' individual demand functions do not respond to increased competition in the manner predicted by the theory. We also present evidence that the Finnish Treasury acts strategically, taking into account the fact that the auctions are part of a repeated game between the Treasury and the primary dealers. Empirically, the main driver behind bidder behaviour and underpricing is the volatility of bond returns. Since there is no evidence that bidders are risk averse, this suggests that private information and the winner's curse may play an important role in these auctions.

Keywords: Multiunit auctions, uniform price, treasury auctions, market power, demand functions, underpricing, supply uncertainty, seller behaviour

JEL Classification: D44, G10

Suggested Citation

Keloharju, Matti and Nyborg, Kjell G. and Rydqvist, Kristian, Strategic Behaviour and Underpricing in Uniform Price Auctions: Evidence from Finnish Treasury Auctions (October 2002). CEPR Discussion Paper No. 3586. Available at SSRN: https://ssrn.com/abstract=352800

Matti Keloharju

Aalto University - School of Business ( email )

P.O. Box 21210
AALTO, FI-00076
Finland
+358 40 353 8043 (Phone)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Kjell G. Nyborg

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41 (0)44 634 2980 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Kristian Rydqvist (Contact Author)

State University of New York at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States
607-777-2673 (Phone)
607-777-4422 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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