CAREER: Empirical Analysis of Financial Markets Using Auction Data

Project Outcomes Statement

The common denominator of my work funded under this award is using data from various auction markets together with economic models to study different financial markets. My work led to several published articles and working papers.

Perhaps the most important outcome of these papers is the technique for using data from Treasury auctions and/or QE auctions to draw inference about financial health of participating banks and to estimate how it evolves over time. I also show how such data can be used to quantify the extent of market power in Treasuries markets. As an illustrative example, I showed that the US Treasury market exhibits surprisingly little market power, but nevertheless there are significant differences between primary dealers, direct participants, and indirect participants (or “clients”) and that primary dealers get significant rents from observing clients' order flow. I further examined the Canadian financial market during the 2008 financial crisis and showed that market participants seemed to have suffered only for a very limited time and that overall, the Bank of Canada seemed to have kept that market under control.

I also analyzed the QE Auctions of the Bank of England. I illustrated that the QE auctions might have prevented potential fire sales. Furthermore, I estimate that the cost to the central bank was very reasonable and hence such special liquidity-providing facilities seem to be a very useful tool to employ in the time of crisis going forward.

The broader impact of my research lies in the potential of using the estimators I developed to: (i) measure market power in treasury auctions, (ii) evaluate the financial health of individual banks, (iii) quantify the importance of a bank for the whole system, (iv) estimate potential price impact (or extent of fire sales) and (v) evaluate the cost of QE auctions. These measures could be used to aid in policy making and designing the regulatory environment.