An Analysis of Bidding in the Japanese Government Bond Auctions

Authors

  • Yasushi Hamao,

    1. Graduate School of Business, Columbia University
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  • Narasimhan Jegadeesh

    1. College of Commerce and Business Administration, University of Illinois, Urbana-Champaign
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    • * Hamao is with the Graduate School of Business, Columbia University, and Jegadeesh is with the College of Commerce and Business Administration, University of Illinois, Urbana-Champaign. We thank Daiwa Securities, Goldman Sachs (Japan), Japan Bond Trading, and the Ministry of Finance, Japan for providing the data; Osamu Kamijo, Tadashi Kikugawa, Ted Leh, Naho Kimoto, Yoko Matsunaga, John McMillan, two anonymous referees, Bryan Routledge, Yoshiaki Shikano, Kenneth Singleton, René Stulz (the editor), Suresh Sundaresan, and Toshiki Yotsuzuka for helpful comments and conversations; and Mingzhu Wang for research assistance. Earlier versions of this paper were presented at Cornell University, University of Southern California, University of Wisconsin, Madison, Yale University, the “Emerging Trends in Japanese Financial Markets” conference at Columbia University, the “Investing in Asian Markets” conference at Hofstra University, Asia Pacific Finance Association Meetings in Hong Kong, and Japan Association for Financial Economics Meetings in Tokyo. We gratefully acknowledge support from Mitsubishi Trust and Banking Professorship at Columbia University (Hamao) and University of Illinois Summer Research Grant (Jegadeesh).

Abstract

We examine the bidding patterns and auction profits in the Japanese Government Bond (JGB) auctions and empirically test the predictions of auction theory. We find that the average profit in JGB auctions is not reliably different from zero, and the degree of competition and the level of uncertainty are insignificant in determining auction profits. The winning shares of the U.S. dealers are positively related to auction profits, whereas the winning shares of their Japanese counterparts show a negative association. We also find that the share of winnings of Japanese dealers tends to be correlated with the share of winnings of their compatriot dealers but a similar relation is not found for U.S. dealers.

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