A Troubled Asset Reverse Auction

The US Treasury has proposed purchasing $700 billion of troubled assets to restore liquidity and solve the current financial crisis, using market mechanisms such as reverse auctions where appropriate. This paper presents a high-level design for a troubled asset reverse auction and discusses the auction design issues. We assume that the key objectives of the auction are to: 1) provide a quick and effective means to purchase troubled assets and increase liquidity; 2) protect the taxpayer by yielding a price for assets related to their value; and 3) offer a transparent rules-based process that minimizes discretion and favoritism. We propose a two-part approach. Part 1. Groups of related securities are purchased in simultaneous descending clock auctions. The auctions operate on a security-by-security basis to avoid adverse selection. To assure that the auction for each security is competitive, the demand for each security is capped at the total quantity offered by all but the largest three sellers. Demand bids from private buyers are also allowed. The simultaneous clock auctions protect the taxpayer by yielding a competitive price for each security and allow bidders to manage liquidity constraints and portfolio risk. The resulting price discovery also improves the liquidity of the securities that are not purchased in the auctions. Part 2. Following Part 1, the remaining quantity is purchased in descending clock auctions in which many securities are pooled together. To minimize adverse selection, reference prices are calculated for each security from a model that includes all of the characteristics of each security including the market information revealed in the security-by-security auctions of Part 1. Bids in the pooled auctions are specified in terms of a percentage of the reference price for each security.Auctions, financial auctions, financial crisis

Bidder behavior in repo auctions without minimum bid rate : evidence from the Bundesbank

A distinguishing feature of the ECB’s monetary policy setup is the preannouncement of a minimum bid rate in its weekly repo auctions. However, whenever interest rates are expected to decline, the minimum bid rate is viewed as too high and banks refrain from bidding, severely impeding the ECB’s money market management. To shed more light on banks’ underbidding, we perform a panel analysis of the bidder behavior in the repo auctions of the Bundesbank where no minimum bid rate was set. Our results indicate that neither bank’s participation nor the submitted bid amount is significantly affected by an expected rate cut. This suggests that abandoning the minimum bid rate might increase the efficiency of the ECB’s money market management.Nach dem Vorbild der Deutschen Bundesbank spielen wöchentliche Repo-Auktionen (die Hauptrefinanzierungsgeschäfte) eine zentrale Rolle für die Geldpolitik der Europäischen Zentralbank. Das dort bereitgestellte Refinanzierungsvolumen bestimmt die Liquidität des Bankensektors und der dabei von der EZB gesetzte Mindestbietungssatz gilt als geldpolitischer Leitzins für die Zinssätze am Interbankengeldmarkt. Ausgangspunkt dieser Arbeit ist die Beobachtung, dass die Verwendung eines Mindestbietungssatzes bei Zinssenkungserwartungen zu einem unerwünschten Unterbieten der Banken führt. Im Extremfall eines Bieterstreiks wird das Liquiditätsmanagement der EZB merklich behindert. Thema dieser Studie ist das Bieteverhalten der Banken bei den Repo-Auktionen der Bundesbank, die in den 90er Jahren bei den Zinstendern auf die Vorgabe eines Mindestbietungssatzes verzichtete. Auf der Grundlage individueller Bietedaten wird mit Hilfe panelökonometrischer Methoden untersucht, wie verschiedene Faktoren, wie zum Beispiel Zinserwartungen, Opportunitätskosten, Zinsunsicherheit oder der Bankentyp die Teilnahmeentscheidung und das Bietevolumen einer Bank bei einem Zinstender ohne Mindestbietungssatz bestimmen. Die empirischen Ergebnisse zeigen, dass Zinserwartungen, auch bei den Bundesbank Auktionen das Bieteverhalten der Banken beeinflussten. Allerdings verursachen Zinserwartungen im Gegensatz zur EZB keine abrupten Änderungen im Bieteverhalten und auch keine Bieterstreiks. Offenbar bewirkte das Fehlen eines Mindestbietungssatzes, dass sich die Gebote der Banken und damit der Reposatz und die Zinssätze am Interbankengeldmarkt graduell an ein verändertes Zinsniveau anpassen konnten

Auction Fever: Theory and Experimental Evidence

It is not a secret that certain auction formats yield on average higher prices than others. The phenomenon that dynamic auctions are more likely to elicit higher bids than static one-shot auctions is often associated with the term ''auction fever.'' On a psychological level, we consider the so-called pseudo-endowment effect as largely responsible for peoples’ tendency to submit higher bids, potentially amplified by the source-dependence effect. The phenomenon of auction fever is replicated in an experimental investigation of different auction formats within a private values framework where bidders have private but incomplete knowledge of their valuation for a hypothetical good. We suggest this assumption to be more realistic than definite private values, as assumed in the traditional IPV model. An additional experimental investigation within the traditional IPV framework does not either reveal any indication for the appearance of auction fever. On the basis of our experimental observations we present a model of reference-dependent utility theory that comprehends the phenomenon by assuming that bidders' reference points are shifted by the pseudo-endowment and the source-dependence effect.

Tractors on eBay: Differences between Internet and In-Person Auctions

Internet auction platforms are changing the face of transactions in many business sectors, including agriculture. We provide one of the first systematic examinations of the differences between internet and in-person auctions in agricultural input markets. A hedonic model estimated with used tractor transactions from Midwestern sellers pooled between eBay and in-person auctions reveals statistically distinct price surfaces for the two auction venues and predicts significantly lower prices for comparable equipment sold on eBay, though this difference is attenuated for tractors fully covered by eBay's buyer protection program and is fully absent for the most frequently traded tractor. An endogenous venue-selection model reveals that larger, more-valuable tractors are less likely to be offered on eBay, a choice that should enhance seller revenues. Furthermore, sellers in states with more valuable stocks of machinery, more frequent tractor sales, and a lower propensity to use the internet for agricultural marketing are more likely to offer tractors for sale via in-person auctions than on eBay.auctions, electronic commerce, eBay, farm equipment, hedonic models, Marketing, D44, Q13,

Reserve price effects in auctions: estimates from multiple RD designs

We present evidence from 260,000 online auctions of second-hand cars to identify the impact of public reserve prices on auction outcomes. To establish causality, we exploit multiple discontinuities in the relationship between reserve prices and vehicle characteristics to present RD estimates of reserve price effects on auction outcomes. Our first set of results show that, in line with the robust predictions of auction theory, an increase in reserve price decreases the number of bidders, increases the likelihood the object remains unsold, and increases expected revenue conditional on sale. Reserve price effects are found to be larger when there are more entrants, and when the reserve price is lower to begin with. Our second set of results then combine these estimates to calibrate the reserve price effect on the auctioneer's expected revenue. This reveals the auctioneer's reserve price policy to be locally optimal. Our final set of results provide novel evidence on reserve price effects on the composition of bidders. We find that an increase in reserve price: (i) decreases the number of potential bidders as identified through individual web browsing histories; (ii) leads to only more experienced and historically successful bidders still entering the auction; (iii) the characteristics of actual winners are less sensitive to the reserve price than those of the average bidder, suggesting auction winners are not the marginal entrant.

Measuring the impact of market coupling on the Italian electricity market using ELFO++

This paper evaluates the impact on the Italian electricity market of replacing the current explicit auction mechanism with market coupling. Maximizing the use of the cross-border interconnection capacity, market coupling increases the level of market integration and facilitates the access to low-cost generation by consumers located in high-cost generation countries. Thus, it is expected that a high-priced area such as Italy could greatly benefit from the introduction of this mechanism. In this paper, the welfare benefits are estimated under alternative market scenarios for 2012, employing the optimal dispatch model ELFO++. The results of the simulations suggest that the improvement in social surplus is likely to be significant, especially when market fundamentals are tight.Market coupling; market integration; Italian day-ahead electricity market.