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Repo Auctions and the Market for Liquidity


  • We wish to thank the ECB's Front Office Division for providing secondary market data and Jean-Louis Schirmann for helpful discussions on the microstructure of the euro area money market. We wish to thank two anonymous referees as well as the editor, Deborah Lucas, for helpful comments and suggestions. We also wish to thank Philipp Hartmann, Harry Paarsch, Witold Rutkowski, Kristian Rydqvist, Anderson Silva, as well as seminar participants at Arizona State University, Carnegie Mellon, Cass Business School, European Central Bank, Hebrew University of Jerusalem, Norges Bank (Norwegian Central Bank), Norwegian School of Economics and Business Administration (NHH), Norwegian School of Management (BI), University of California–Los Angeles, University of California–San Diego, University of North Carolina, Tel Aviv, Zürich, and the following conferences, American Finance Association (Washington, DC, 2003), Auctions and Market Design (Fondazione Eni Enrico Mattei, Milan, September 2003), European Finance Association (Berlin, 2002), for comments and suggestions. Nyborg would like to thank the ECB's Directorate General Research for its invitation to a research stay in the autumn of 2001. Strebulaev would like to thank the ECB for the opportunity to visit it for the purpose of this research project.


What is the nature of imperfections in the market for liquidity? Studying bidder level data from European Central Bank (ECB) repo auctions, we find that this market appears to be informationally efficient in the sense that participants do not have private information about future short-term rates. However, auction allocations affect banks' subsequent behavior in a way that is consistent with a degree of allocational and operational inefficiency. Also, large bidders appear to have better access to the interbank market than small ones. Finally, the evidence suggests that the ECB uses collateral haircuts that do not equilibrate opportunity costs.

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