Empirical Analysis of Auction Markets: Liquidity, Electricity and Information Structure

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The focus of this research is the analysis of strategic bidding behavior and recovering information contained in bids in important auction markets: liquidity, electricity and procurement auctions. The recent financial crisis has underlined the importance of understanding the mechanics of the banking system and especially the mechanisms used to allocate liquidity/short-term funds across the system. The first research project analyzes a particular mechanism used to allocate short-term funds: the European Central Bank's (ECB) weekly refinancing auctions, the primary mechanism through which the ECB supplies liquidity to the Euro-zone banking sector. We use detailed bank-level data and we model banks' observed actions in these auctions in order to infer interest rates each bank would have to pay in the over-the-counter interbank market to obtain a loan. One of the main goals of this project is to demonstrate that interpreting bidding data from liquidity auctions through an economic model allows the researcher to gain insights into financial health of participating banks. The central banks could thus be using these data to provide them with early warning signals about financial situation of commercial banks and with information about bank-specific interest rates prevailing on the opaque (over-the-counter) interbank market.The second project focuses on analyzing the impact of the prices of emission permits on bidding behavior and subsequent electricity generation in the deregulated Italian electricity market. It utilizes data from day-ahead, balancing and dispatch auction markets together with information on forward contracts and emission permit prices and allocations to investigate whether higher permit prices lead to more electricity generation by clean energy sources. This question is very important from policy perspective since the very goal of emission permits is to re-allocate electricity generation to cleaner energy sources. The Italian market is very well suited for this analysis since fossil-fueled generators constitute the major source of electricity production and there is significant variation in the emissions of CO2 among these generators. The goal is thus to quantify, for a given price of coal, gas and oil, at what emission permit prices we should expect to see shifts to cleaner energy.The third project proposes a novel method for recovering bidders' beliefs about the extent of competition they face in an auction from the observed bids. Most of the previous empirical auctions literature makes various assumptions about bidders? knowledge about their competition. These assumptions have often been criticized as being too restrictive. The main goal of this methodological contribution is to provide a novel approach how to circumvent making these assumptions and to provide a new method for testing for collusion in important auction markets, such as procurement auctions for highway construction or auctions of oil leases. Broader impacts include improved central bank operation, new insight into how to encourage cleaner energy usage, and new methods for research in auction markets.