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Price elasticity of demand and risk-bearing capacity in sovereign bond auctions
José Afonso Faias
G12 - Asset Pricing
G20 - General
G24 - Investment Banking; Venture Capital; Brokerage
The paper uses bids submitted by primary dealer banks at auctions of sovereign bonds to quantify the price elasticity of demand. The price elasticity of demand correlates strongly with the volatility of returns of the same bonds traded in the secondary market but only weakly with their bid-ask spread. The price elasticity of demand predicts same-bond post-auction returns in the secondary market, even after controlling for pre-auction volatility. The evidence suggests that the price elasticity of demand is associated with the magnitude of price pressure in the secondary market around auction days, and proxies for primary dealer risk-bearing capacity.