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

Author(s): Matti Keloharju, Kjell G Nyborg and Kristian Rydqvist

Publication Date: October 2002

Keyword(s): demand functions, market power, multiunit auctions, seller behaviour, supply uncertainty, treasury auctions, underpricing and uniform price

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Keloharju, M, Nyborg, K and Rydqvist, K. 2002. 'Strategic Behaviour and Underpricing in Uniform Price Auctions: Evidence from Finnish Treasury Auctions'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3586