Strategic Behavior and Underpricing in Uniform Price Auctions

Matti Keloharju, Kjell Nyborg and Kristian Rydqvist
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Kristian Rydqvist: Binghamton University and CEPR

No 2003.25, Working Papers from Fondazione Eni Enrico Mattei

Abstract: We study uniform price auctions using a dataset which includes individual bidders' demand schedules in Finnish Treasury auctions during the period 1992-99. Average underpricing amounts to .041% of face value. Theory suggests that underpricing may result from monopsonistic market power. We develop and test robust implications from this theory and ¯nd 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 behavior 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 auctions; treasury auctions; market power; demand functions; underpricing; supply uncertainty; seller behavior (search for similar items in EconPapers)
JEL-codes: D44 G10 (search for similar items in EconPapers)
Date: 2003-03
New Economics Papers: this item is included in nep-mic
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2003.25

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