A positive theory of fixed-rate funds-supplying operations in an accommodative financial environment

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

This paper studies bidding behaviors in fixed-rate funds-supplying auctions using a simple game-theoretic model. While the existing literature argues that such auction schemes are vulnerable to the overbidding problem, the bid-to-cover ratio for the Bank of Japan's current fixed-rate operations has remained stable. After reviewing the stylized repo game and the mechanism of overbidding under the fixed-rate operations, we argue that the current framework of fixed-rate funds-supplying auctions operated by the Bank of Japan and the recent accommodative financial environment make bidders' loss functions locally satiated. Given this argument, it is shown that any stable bid-to-cover ratios other than either undersubscription or overbidding can be supported by an equilibrium. Finally, we empirically find that the ratio under the Bank of Japan operations has been influenced by such financial conditions proxied by market interest rates and term spreads.

Original languageEnglish
Pages (from-to)595-610
Number of pages16
JournalJournal of International Money and Finance
Volume32
Issue number1
DOIs
Publication statusPublished - 2013 Jan 1
Externally publishedYes

Fingerprint

Bank of Japan
Auctions
Overbidding
Bid
Simple game
Game-theoretic models
Term spread
Bidding behavior
Interest rate spread
Reviewing
Financial condition
Loss function

Keywords

  • Bank of Japan
  • European Central Bank
  • Fixed-rate funds-supplying auctions
  • Overbidding problem
  • Strategic form game

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

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title = "A positive theory of fixed-rate funds-supplying operations in an accommodative financial environment",
abstract = "This paper studies bidding behaviors in fixed-rate funds-supplying auctions using a simple game-theoretic model. While the existing literature argues that such auction schemes are vulnerable to the overbidding problem, the bid-to-cover ratio for the Bank of Japan's current fixed-rate operations has remained stable. After reviewing the stylized repo game and the mechanism of overbidding under the fixed-rate operations, we argue that the current framework of fixed-rate funds-supplying auctions operated by the Bank of Japan and the recent accommodative financial environment make bidders' loss functions locally satiated. Given this argument, it is shown that any stable bid-to-cover ratios other than either undersubscription or overbidding can be supported by an equilibrium. Finally, we empirically find that the ratio under the Bank of Japan operations has been influenced by such financial conditions proxied by market interest rates and term spreads.",
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