The performance of the Eurosystem's fixed rate tenders since 2004: Theory and evidence

Despite the possibility of overbidding, the Eurosystem has con- tinued using the fixed rate tender in its liquidity management. We document this fact for liquidity-absorbing fine-tuning operations, the USD term auc- tion facility, and EUR/CHF foreign exchange swaps. The mechanism is then studied in an auction-theoretic setting with privately known declining marginal valuations. An equilibrium exists even when bids are costless and the allotment is pre-announced. In this equilibrium, the extent of strate- gic overbidding is limited, and there is a bound below which the allotment quota never falls. In an extension with adaptive expectations, temporarily elevated overbidding factors quickly return to equilibrium levels.