HOW AUCTIONS REVEAL INFORMATION - A CASE-STUDY ON GERMAN REPO RATES

Securities repurchase agreements (REPOs) have become the Bundesbank's most important tool for its ongoing money marker management and the co ntrol of the monetary base. In the fall of 1988, the Bundesbank change d the applied auction rule in order to prevent banks from submitting e xaggerated bids. Focusing on the information content of a resulting RE PO rate, this paper investigates how German money market rates react t o auction results. Evidence is provided that the response of the money market to a new REPO rate reflects the applied auction rule.