A Positive Theory of Fixed-Rate Funds-Supplying Operations in an Accommodative Financial Environment

This paper studies bidding behaviors in fixed-rate funds-supplying auctions using a simple game-theoretic model. While the existing literature argues that such auction schemes are vulnerable to the overbidding problem, the bid-to-cover ratio for the Bank of Japan's current fixed-rate operations has remained stable. We modify the stylized repo game by incorporating the current framework of fixed-rate funds-supplying auctions operated by the Bank of Japan and the accommodative financial environment recently experienced in Japan. It is shown that any stable bid-to-cover ratios other than either undersubscription or overbidding can be supported by an equilibrium in the modified game.