Overbidding in Fixed-Rate Tenders: The Role of Exposure Risk

The …xed rate tender is one of the main operational formats usedby central banks in the implementation of their monetary policies. Whileacademic research has largely dismissed the procedure for its tendency to en-courage overbidding, central banks such as the ECB and the Bank of Englandhave continued using it. We elaborate on this apparent conflict by consid-ering an auction-theoretic setting with privately known declining marginalvaluations. Since overbidding entails exposure risk, an equilibrium may existeven if bids are costless and the intended amount is pre-announced. In fact,rationing may occur with certainty. The equilibrium is also robust underadaptive expectations. However, the resulting allocation is typically inefficient. Empirical proxies of exposure risk are signi…cant in both Euro andSterling operations. Our …ndings have implications, in particular, for thepotential re-introduction of rationing in the main re…nancing operations ofthe Eurosystem.[...]