Abstract

AbstractWe provide evidence for the euro area of spillovers from foreign public debt auctions into domestic secondary‐market auction cycles. We also confirm existing evidence of such spillovers from domestic issues into the domestic secondary market. Consistent with a theory of primary dealers’ limited risk‐bearing capacity, we find that auction cycles from domestic issues are stronger during the recent crisis period, whereas cross‐border effects are stronger in the precrisis period, but this evidence is not strong. This finding likely reflects the opposing effects of reduced sovereign bond market integration during the crisis and higher yield covariances caused by more market volatility.

Highlights

  • Consistent with a theory of primary dealers’ limited risk-bearing capacity, we find that auction cycles from domestic issues are stronger during the recent crisis period, whereas cross-border effects are stronger in the precrisis period, but this evidence is not strong

  • The lack of formal statistical difference may be attributable to the fact that the crisis-period estimates of the cycles associated with foreign auctions are less precisely estimated due to the higher yield volatility. (In all instances, we find that the standard deviation of the estimated spillovers has become higher than in the first subperiod.) in most instances, the cycle estimates remain positive during the crisis period

  • We focused on the period since the inception of the euro area and study both the full sample period and the precrisis and crisis subperiods

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Summary

Auction Mechanisms for Euro Area Public Debt

Euro area treasuries fulfill the largest part of their annual debt issuance requirements through public auctions. The minimum participation requirement on the primary market varies across countries from a minimum purchase requirement of 0.05% of the total amount issued in Germany to a minimum bidding requirement of 3% of all bids per auction in Spain. 4. Concretely, France publishes a monthly calendar that only states dates; Italy publishes quarterly updates of minimum amounts for reopenings and coupons for new issues; the Netherlands and Germany mention the specific bond, the date, and an indicative amount; Belgium and Spain only publish an annual calendar. France publishes a monthly calendar that only states dates; Italy publishes quarterly updates of minimum amounts for reopenings and coupons for new issues; the Netherlands and Germany mention the specific bond, the date, and an indicative amount; Belgium and Spain only publish an annual calendar These calendars are published on the websites of the treasury agencies. Direct bidders are not active in the French and Italian bond auctions, while they are somewhat more active in Spain (see, e.g., OECD 2014)

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Primary Dealer Behavior during the Crisis in Europe
A Model of Auction Cycles and Cross-Border Auction Spillovers
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An Event Study of Auction Cycles
REGRESSION EVIDENCE OF AUCTION CYCLES
Baseline Regression
Accounting for the Overlap in the Primary Dealer Base
Splitting between the Precrisis and the Crisis Periods
Linking Auction Cycles to Market Volatility
Findings
CONCLUDING REMARKS
Full Text
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