Treasury Bond Auctions: Repurchase Agreements and Bidding Behavior

Abstract

We investigate bidding behavior and auction performance in Norwegian treasury bond auctions. We test theoretical predictions of bidding behavior introduced by Back and Zender (1993) and Kyle (1989). The models help explain many of the dynamics of bidding behavior we find, but the demand schedules submitted contributes to an overall rejection of the models. In addition, we introduce an explanatory variable that helps explain the interaction between bidding behavior and pre-auction inventory. We find that dealers with larger pre-auction repurchase agreements bid higher prices in the auction, implying that pre-auction inventory impacts the valuation of the auctioned asset, just as predicted in the simplified equilibrium model proposed by (Nyborg and Strebulaev (2004)).