Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2005/13: Bidding and Performance in Repo Auctions: Evidence from ECB Open Market Operations

Ulrich Bindseil (), Kjell G. Nyborg () and Ilya A. Strebulaev ()
Additional contact information
Ulrich Bindseil: European Central Bank, Postal: European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany
Kjell G. Nyborg: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway
Ilya A. Strebulaev: Graduate School of Business, Stanford University, Postal: Graduate School of Business, Stanford University, 518 Memorial Way, Stanford, CA 94305 , United States

Abstract: Repo auctions are used to inject central bank funds against collateral into the banking sector. The ECB uses standard discriminatory auctions and hundreds of banks participate. The amount auctioned over the monthly reserve maintenance period is in principle exactly what banks collectively need to fulfill reserve requirements. We study bidder-level data and find: (i) Bidder behavior is different from what is documented for treasury auctions. Private information and the winner’s curse seem to be relatively unimportant. (ii) Underpricing is positively related to the difference between the interbank rate and the auction minimum bid rate, with the latter appearing to be a binding constraint. (iii) Bidders are more aggressive when the imbalance of awards in the previous auction is larger. (iv) Large bidders do better than small bidders. Some of our findings suggests that bidders are concerned with the loser’s nightmare and have limited amounts of the cheapest eligible collateral.

Keywords: Repo auctions; multiunit auctions; reserve requirements; loser’s nightmare; money markets; central bank; collateral; open market operations

JEL-codes: D44; E43; E50; G12; G21

50 pages, December 22, 2005

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