Valuing Dealers' Informational Advantage: A Study of Canadian Treasury Auctions

Ali Hortaçsu, Jakub Kastl

Research output: Contribution to journalArticlepeer-review

28 Scopus citations

Abstract

In many financial markets, dealers have the advantage of observing the orders of their customers. To quantify the economic benefit that dealers derive from this advantage, we study detailed data from Canadian Treasury auctions, where dealers observe customer bids while preparing their own bids. In this setting, dealers can use information on customer bids to learn about (i) competition, that is, the distribution of competing bids in the auction, and (ii) fundamentals, that is, the ex post value of the security being auctioned. We devise formal hypothesis tests for both sources of informational advantage. In our data, we do not find evidence that dealers are learning about fundamentals. We find that the "information about competition" contained in customer bids accounts for 13-27% of dealers' expected profits.

Original languageEnglish (US)
Pages (from-to)2511-2542
Number of pages32
JournalEconometrica
Volume80
Issue number6
DOIs
StatePublished - Nov 1 2012
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Multi-unit auctions
  • Nonparametric identification and estimation
  • Structural estimation
  • Test for common values
  • Treasury auctions

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