Why did the banks overbid? An empirical model of the fixed rate tenders ofthe European Central Bank

This paper tests two alternative hypotheses for the overbidding behavior of the banks in the fixed rate tenders conducted by the European Central Bank (ECB) from January 1999 until June 2000. One hypothesis attributes the ove rbidding to the expectations of a future tightening of monetary policy, whi le the other attributes it to the liquidity allotment decisions of the ECB. The model is estimated with individual bidding data of the Spanish banks, and also with aggregate bidding data of all Spanish banks and all banks in the euro area. The empirical results provide support for the second hypothe sis. (C) 2001 Elsevier Science Ltd. All rights reserved.