Closing call auctions and liquidity

The present paper examines the impact of closing call auctions on liquidity. It exploits the natural experiment offered by the introduction of a closing call auction on the Australian Stock Exchange on 10 February 1997. The introduction of the closing call auction is associated with a reduction in trading volume at the close of continuous trading. However, bid‐ask spreads during continuous trading are largely unaffected by the introduction of the closing call auction. Therefore, closing call auctions consolidate liquidity at a single point in time without having any adverse effect on the cost of trading.     

Clearing price distributions in call auctions

We propose a model for price formation in financial markets based on the clearing of a standard call auction with random orders, and verify its validity for prediction of the daily closing price distribution statistically. The model considers random buy and sell orders, placed employing demand- and supply-side valuation distributions; an equilibrium equation then leads to a distribution for clearing price and transacted volume. Bid and ask volumes are left as free parameters, permitting possibly heavy-tailed or very skewed order flow conditions. In highly liquid auctions, the clearing price distribution converges to an asymptotically normal central limit, with mean and variance in terms of supply/demand-valuation distributions and order flow imbalance. By means of simulations, we illustrate the influence of variations in order flow and valuation distributions on price/volume, noting a distinction between high- and low-volume auction price variance. To verify the validity of the model statistically, we predict a year's worth of daily closing price distributions for five constituents of the Eurostoxx 50 index; Kolmogorov–Smirnov statistics and QQ-plots demonstrate with ample statistical significance that the model predicts closing price distributions accurately, and compares favourably with alternative methods of prediction.     

Price synchronicity: The closing call auction and the London stock market

In this paper, we consider the impact of the introduction of a closing call auction on market quality of the London Stock Exchange. We employ the market model, RDD and MEC metrics of market quality. These signify substantial improvements to market quality at both the close and open for migrating stocks. We note that these improvements are larger at the open than the close. An important contribution of our paper is that we show that changes to market quality are stronger in those securities that have the lowest liquidity in the pre-call period. In contrast, market quality changes following the introduction of a closing call auction are approximately neutral for high-liquidity securities. We conclude that the implementation of a closing call auction, for high-liquidity securities may not enhance market quality.     

Bidding behavior in the SNB’s repo auctions

The Swiss National Bank (SNB) provides reserves to market participants via fixed rate tender auctions. We analyze the banks’ bidding behavior and identify the determinants for the decision to participate as well as on the amount to tender. We find that a bank’s bids from the previous day, the amount of maturing repo operations with the SNB as well as the maturing volume on the interbank repo market have for most banks a significant effect. The autonomous factors (government balances at the SNB and currency in circulation) are of only minor importance. A further determinant is the attractiveness of the SNB’s auction rate compared to the prevailing interbank market repo rate. Further, the question is addressed whether the bidding behavior changed in the financial market crisis of 2007/2008. There is little evidence of a systematic change in bidding behavior in the crisis. This results from the fact that the SNB has addressed the volatile demand for reserves in the crisis with overnight fine-tuning operations.     

The interaction between opening call auctions and ongoing trade: Evidence from the NYSE

We investigate the impact that the opening batch has on trading for the remainder of the day and what impact the prior day's trading has on the subsequent day's open. Traders have an interest in these trading impacts as their trades may cluster around opening and closing time periods. We find that the larger the volume in the opening batches, the greater the volume across the day. We also find the prior day's volume being positively related to the subsequent day's opening volume. Combined, these results suggest a continuing pattern of trade volume rolling from one day to the next. Additionally, we find that the spread in the continuous market can be partially attributed to the price change in the opening batch. We also find evidence of opening trade price reversals. Combined with the absence of price reversals following the opening trade, we conclude that the opening process may be more efficient at handling information than the continuous market.     

The effect of a closing call auction on market quality and trading strategies

We study the effects of the introduction of a closing auction (CA) on the microstructure on the continuous trading phase in Borsa Italiana and Paris Bourse. We postulate and compare several empirical predictions based on both standard Kyle-type models and more recent models of limit order book. We find that while the CA has no effect during most of the day, its effect on the last minutes of trading is dramatic. We document a sharp decline in volume, associated with a significant reduction in spread and volatility, and an increase in aggressiveness of liquidity suppliers during the last minutes. We show that the differences in the Reference Price algorithm between Milan and Paris have a significant effect: the CA attracts greater volumes when the Reference Price is equated to the CA price.     

新加坡《公平交易指引》概要

为了敦促金融机构为客户提供公平交易,新加坡金融管理局近期颁布了<公平交易指引--董事会和高级管理层应肩负公平对待客户的职责>(以下简称<指引>).<指引>充分考虑了公众意见、近期金融危机的教训以及新加坡金融管理局于2009年3月发布的<非公众投资产品销售和推广的监管体制修订版(草案)>的相关内容.本文简要介绍<指引>的背景材料,并对<指引>的内容进行编译,供开展银行卡业务的银行机构及其从业人员参考.     

Bidder behavior in central bank repo auctions: Evidence from the Bundesbank

For many central banks, repo auctions are the most important monetary policy instrument. This paper employs a unique data set of individual bids submitted in the repo auctions of the Bundesbank to analyze the determinants of banks’ bidding behavior and the empirical performance of repo auctions. We conduct a panel analysis to estimate how banks bidding is affected by various auction as well as bidder-specific factors including interest rate expectations, interest rate uncertainty, maturing allotment, reserve fulfillment and a bank’s size.     

Complements and substitutes in sequential auctions: the case of water auctions

We use data on sequential water auctions to estimate demand when units are complements or substitutes. A sequential English auction model determines the estimating structural equations. When units are complements, one bidder wins all units by paying a high price for the first unit, thus deterring others from bidding on subsequent units. When units are substitutes, different bidders win the units with positive probability, paying prices similar in magnitude. We recover individual demand consistent with this stark pattern of outcomes and confirm it is not collusive but consistent with noncooperative behavior. Demand estimates are biased if one ignores these features.     

Forward looking behavior in ECB liquidity auctions: Evidence from the pre-crisis period

Using data from the pre-crisis period we investigate banks' joint bidding behavior in the ECB's Main Refinancing Operations (MRO) and Longer Term Refinancing Operations (LTRO). We test whether banks bid at lower rates in MROs before the LTRO and at higher rates after the LTRO, compared to other operations. We motivate this by findings from the auction literature suggesting that agents' bidding behavior is forward looking and takes sequences of future auctions into account.We offer two findings. First, we find that in general banks bid in the MRO before the LTRO at lower rates as compared to other MROs. Moreover, MRO participants that also bid in the following LTRO bid at even lower rates, compared to peers not bidding in the LTRO. These findings support the hypothesis that banks view obtaining liquidity from the two operations as a substitute. Second, we find that banks generally bid more aggressively in the MRO after the LTRO. Banks that participated also in the LTRO preceding the MRO bid at substantially higher rates. These findings reflect that “short” banks, with potentially large net liquidity needs in the MRO after the LTRO, bid more aggressively. Although size plays a considerable role for bidding behavior, the conclusions are valid for banks of different sizes.     

Pre-auction short positions and impacts on primary dealers’ bidding behavior in US Treasury auctions

We model the uniform-price US Treasury security auction as a static symmetric game with incomplete information in which each player is a primary dealer who submits a demand schedule given two independent sources of private information: her/his pre-auction short position of the auctioned security and her/his valuation of this security. Under the assumptions of constant marginal value and additive separability of the demand schedule, we obtain closed-form solutions for the dealer’s optimal demand schedule, and we find that her/his pre-auction short position impacts her/his bidding behavior in three ways. First, the primary dealer’s demand for the auctioned security increases with her/his pre-auction short position. Second, the primary dealer’s differential bid shading decreases with her/his pre-auction short position. Third, primary dealers with higher pre-auction short positions assign lower values to the auctioned security. Based on our findings, we propose policy recommendations that would allow the US Treasury to increase taxpayers’ revenue.     

Collusion in uniform-price auctions: experimental evidence and implication for treasury auctions

We provide experimental evidence that nonbinding preplay communicationbetween bidders in auctions of shares facilitates the adoptionof equilibrium strategies: collusive strategies in uniform-priceauctions, and the unique equilibrium in undominated strategiesin discriminatory auctions. When communication between biddersis introduced, clearing prices and auctioneer profits in uniform-priceauctions fall below those observed in discriminatory auctions.This evidence suggests that uniform-price auctions of Treasurysecurities may result in lower revenues than the currently employeddiscriminatory procedure.     

Bank capitalization and lending behavior after the introduction of the Basle Accord

In this paper, we provide evidence that banks with a low level of capitalization have reduced their commitment with respect to lines of credit after the introduction of the Basle Accord. A bank's lending behavior reflects its level of commitment towards borrowers, which in turn affects the level of effort it exerts on screening and monitoring the activities of borrowers. We find that the post-Basle Accord market reaction to the announcement of lines of credit issued by banks with a low level of capitalization is significantly lower than the reaction to other types of bank credit announcements. We interpret this result as evidence that some banks have a low level of commitment associated with lines of credit after the Basle Accord.

Probability of call and likelihood of the call feature in a corporate bond

This paper suggests a new way of predicting the likelihood of a corporate bond being callable. We compute the probability that a bond, if callable, would actually be called within a certain period. We also hypothesize a positive relationship between this probability and the likelihood of the bond being issued with a call feature. Comparative static results yield the following empirical implications: the likelihood of a call feature should be an increasing function of coupon rate, corporate tax rate and leverage ratio, and a decreasing function of interest rate and firm risk (volatility). Tests with recently issued corporate bonds provide fairly strong support for the model’s predictions.     

Unobserved heterogeneity and reserve prices in auctions

This article shows how reserve prices can be used to control for unobserved object heterogeneity to identify and estimate the distribution of bidder values in auctions. Reserve prices are assumed to be monotonic in the realization of unobserved heterogeneity, but not necessarily set optimally. The model is estimated using transaction prices from a used car auction platform to show that the platform enables sellers to capture a large fraction of the potential value from selling their vehicle. Individual sellers benefit mostly from access to a large set of buyers, but the magnitude depends on accounting for unobserved heterogeneity.     

Revenue and optimality in unequal-sized share auctions

This paper analyzes unequal-sized share auctions with symmetric private-value buyers. The property that each buyer can win at most one unit, but variable-sized, makes share auctions situated between single-unit auctions and multiunit auctions. We calculate revenue and optimality of efficient share auctions and discuss how the optimal reserve valuation varies according to risk attitude towards share size.     

Impact of the introduction of call auction on price discovery: Evidence from the Indian stock market using high-frequency data

Call markets are claimed to aggregate information and facilitate price discovery where continuous markets may fail. The impact of the introduction of call auction has not been found uniformly beneficial, possibly due to poor design or due to ‘thick market externalities’. This paper examines the reintroduction of opening call auction at the National Stock Exchange of India in 2010. The results suggest that the auctions attract very little volume, the intraday pattern of volume and volatility in the continuous market remains unchanged and a large fraction of price discovery, measured by the Weighted Price Contribution, still takes place in the first 15 min of continuous market. However, the market synchronicity has improved after the introduction of the auction. Our findings suggest that the ability to attract volume in the call auction for effective price discovery depends on the institutional settings and the characteristics of liquidity supply in the market.     

Ordering,revenue and anchoring in art auctions

We estimate the effect of ordering by value on revenues in sequential art auctions held by Sotheby's and Christie's. We exploit a pre determined rotation of which of these two houses holds their auction first during auction week in New York City. When the house that goes first has relatively expensive paintings compared to the other house, we find that the sale premium for the week is around 21% higher relative to the mean sale premium, and the fraction of paintings sold during the week is around 11% higher. We provide evidence that this is due to an anchoring effect.     

Determinants of the bid-to-cover ratio in Eurozone sovereign debt auctions

Building on a unique dataset of Eurozone sovereign debt auctions, this paper analyzes the determinants of their bid-to-cover ratios, which is the most common measure of the outcome of an auction. We find that the secondary market yield on the same maturity instrument, past domestic and foreign bid-to-cover ratios and occasionally the number of primary dealers tend to exert a positive effect on the current bid-to-cover ratio, while the opposite is the case for the supply and the volatility of the yield. The results thus suggest that past information helps to predict the demand in auctions.     

The behavior of stock returns in the mining industry following the Iraq war

The aim of this article is to characterize the dynamics of stock returns of 10 leading mining firms over a politically unstable period, marked by 9/11 and the subsequent invasion of Iraq. To that end, we analyze the evolution of return volatility over time, examine the dynamics of volatility persistence, and test for the presence of volatility shifts. We also examine whether volatility and trading volume obey the one-factor mixture-of-distribution hypothesis (MDH). Finally, we analyze whether the performance of mining stock returns may be influenced by the evolution of the energy sector. The results suggest that firms which belong to the same industry did not necessarily exhibit identical patterns of return volatility. Secondly, shocks to volatility and volume are in general dynamically asymmetric, which violates the one-factor MDH. Thirdly, the metals and minerals analyzed exhibited different degrees of dependency on energy prices.